Before BUFFINGTON, DAVIS, and THOMPSON, Circuit Judges.
This appeal involves the liability of the taxpayer, the Lincoln Mortgage & Title Guaranty Company for income taxes for the years 1926 and 1927.
The taxpayer was incorporated under the insurance laws of the State of New Jersey and was operated under the direction and supervision of the department of banking and insurance of that state.
The taxpayer was principally engaged in the business of lending money on bonds secured by mortgages on real estate. On approval of an application for a loan, the taxpayer would take a mortgage and a 6 per cent. bond from the borrower and charge him a lending fee of from 3 to 5 per cent. The taxpayer would then sell the bond and mortgage to an investor and would issue to the purchaser an assignable contract which it called a "policy." This policy guaranteed the payment of the principal amount of the bond and mortgage with interest thereon at 5 1/2 per cent. per annum. The taxpayer also sold part interests in bonds and mortgages and issued to the purchaser an assignable participation certificate which had substantially the same terms of guaranty as the policy.
The terms of the policy or participation certificate constituted the taxpayer the agent of the purchaser or assured, to sue for and recover the proceeds of any policy of fire or title insurance covering the mortgaged premises, and to exercise options or privileges given in the bond or mortgage, and permitted the taxpayer to retain as its premium for the guaranty all interests in excess of the rate guaranteed. The purchaser agreed not to collect any interest or principal except through the taxpayer until the breach or termination of the guaranty.
The taxpayer collected 6 per cent interest annually, from the mortgagor, retaining half of 1 per cent. at its premium on the mortgage guaranty and paid the remaining 5 1/2 per cent. to the holder of the mortgage or the holders of the certificates participating therein.
The taxpayer kept the interest accruing between the date of the loan and the sale of the bond and mortgage.
In 1927, the taxpayer received the following income:
"(a) Title Insurance 587.35
"(b) Mortgage Guaranties 300,694.01
"(a) Miscellaneous 223.47
"(b) Drawing Papers 65.00
"(c) Inspections 1,772.50
"2. Interest Earned on: (investments of