Mutual Bldg. & Inv. Co. v. Commissioner , 11 B.T.A. 999 ( 1928 )

MUTUAL BUILDING & INVESTMENT CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Mutual Bldg. & Inv. Co. v. Commissioner

Docket No. 5531.

United States Board of Tax Appeals

11 B.T.A. 999; 1928 BTA LEXIS 3676;

May 3, 1928, Promulgated

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1. A letter written to the petitioner by the respondent, in which claims for abatement were rejected, held to evidence a final determination of a deficiency in tax within the meaning of section 273 of the Revenue Act of 1924.

2. Petitioner held not a building and loan association entitled to exemption from taxation during the year 1921, under section 231(4) of the Revenue Act of 1921.

L. L. Hamby, Esq., for the petitioner.

J. Arthur Adams, Esq., for the respondent.

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SIEFKIN

This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1921, in the amount of $46,004.98.

The error assigned in the amended petition is the holding of the respondent that the petitioner, during the year 1921, was not a domestic building and loan association within the meaning of the Revenue Acts of 1918 and 1921, and was, therefore, not entitled to be exempt from the payment of taxes.

FINDINGS OF FACT.

The petitioner was incorporated on March 31, 1891, under sections 9643 to 9675, both sections inclusive, of the General Code of the State of Ohio.

The constitution of the petitioner reads in part as follows:

The Company is organized for the purpose of raising money to be loaned to its members and others, to be used by them in buying lots and houses, in building and repairing houses, and for such other purposes as are authorized by law.

The petitioner's balance sheets at the beginning and end of the year 1921 are as follows:

January 1, 1921.
ASSETS.
Cash	$186,047.03
Liberty bonds	176,555.73
Real-estate loans	7,984,579.42
Accrued interest
Collateral loans	125,457.11
Taxes and insurance advances	1,785.49
Furniture and fixtures	9,000.00
	8,483,424.78
LIABILITIES.
Notes payable
Loans and accounts payable	11,512.07
Legal reserve	180,000.00
Capital stock, fully paid	1,717,700.00
Capital stock, not fully paid	6,556,930.71
Undivided profits	17,282.00
	8,483,424.78
December 31, 1921.
ASSETS.
Cash	$122,337.40
Liberty bonds	141,580.73
Real-estate loans	8,591,308.49
Accrued interest
Collateral loans	69,625.00
Taxes and insurance advances	3,510.00
Furniture and fixtures	9,000.00
	8,937,361.62
LIABILITIES.
Notes payable
Loans and accounts payable	$69,407.76
Legal reserve	210,000.00
Capital stock, fully paid	1,702,550.00
Capital stock, not fully paid	6,925,575.44
Undivided profits	29,828.42
	8,937,361.62

Of the total loans outstanding during the year 1921 at least 70 per cent of said loans were made to nonmembers or nonstockholders of the petitioner and at least 70 per cent of the petitioner's income for the year 1921 was derived from loans made to nonmembers or nonstockholders of the petitioner.

The total loans made by the petitioner during 1921 amounted to $1,437,490, of which $835,400 was loans made to nonmembers or nonstockholders between the dates of January 1, 1921, and November 23, 1921, and the remainder, $602,090, was loans made to members or stockholders during the entire year 1921.

The loans to members or stockholders and nonmembers or nonstockholders during the years 1918, 1919, and 1920 are shown by the following schedule:

Year.	Members of stockholders.	Nonmembers or nonstockholders.	Total.
1928	$156,100	$724,525	$880,625
1919	531,250	1,904,675	2,435,925
1920	626,700	1,023,100	1,649,800

A large portion of the loans made by the petitioner in years prior to the year 1921 were loans which were paid by the borrower over a period of about 12 years.

The petitioner charged interest on loans made to members or stockholders and nonmembers or nonstockholders at the rate of 8 per cent per annum.

The petitioner paid dividends during the year 1621 at the rate of 7 per cent to 7 1/4 per cent on the amount actually paid in by members or stockholders.

The loans made by the petitioner during the year 1921 were used by the borrowers for the following purposes and in the following amounts:

Homes for borrowers' occupancy (members)	$236,800
Homes not for borrowers' occupancy (members)	175,000
Homes not for borrowers' occupancy (members and nonmembers)	768,900
For purposes other than acquiring homes	256,790
	1,437,490

The petitioner during the year 1921 borrowed $200,000.

The total number of members or stockholders on June 30, 1921, was 4,813.

The total number of borrowers, including members or stockholders and nonmembers or nonstockholders, on June 30, 1921, was 937.

On December 31, 1921, the petitioner had outstanding 3,982 shares of paid-up stock of the face value of $1,702,550 and 25,175 shares of running stock.

The petitioner paid, during the year 1920, dividends as follows:

Paid-up stock	$118,709.64
Running stock	448,544.51
Total	567,254.15

The petitioner has been a member of the Ohio State League of Building and Loan Associations since the beginning of such league, which was about 1908 or 1909. During this time it has had regular annual meetings, has filed annual reports with the association, and at least once every year was inspected by representatives of the association.

The petitioner has never carried any checking accounts, has never made laons except upon first-mortgage real estate or upon stock of the association owned by the person seeking the loan, has never accepted or honored any bills of exchange presented to it by members or nonmembers, and has issued no letters of credit.

The petitioner has maintained a reserve fund in accordance with the Ohio State law which requires that 5 per cent of the annual net profits be put in a reserve fund. In making loans, preference was always given to members of the petitioner.

In 1921 the petitioner never paid a dividend to anyone not a member of the association. It never issued or carried upon its books any permanent nonwithdrawal stock. When stock of petitioner is surrendered the petitioner has the right to reissue it to some one else. In 1921 petitioner issued both paid-up and running stock and paid the same rate of dividend on each.

Loans issued by the petitioner vary in length from one to fifteen years. The outstanding loans as of December 31, 1921, reflect unpaid or parts of unpaid loans made as early as 1906 and thereafter.

The authorized capital stock of the petitioner in 1921 was $20,000,000.

Subsequent to November 23, 1921, the petitioner made no loans to nonmembers.

OPINION.

SIEFKIN: A motion to dismiss the petition was filed by the respondent upon the grounds that a letter written to the petitioner by the respondent on May 23, 1925, rejecting certain claims for abatement filed by the petitioner is not a deficiency letter. An order was entered denying the motion to dismiss upon the grounds that the letter in question evidenced a final determination by the respondent of a deficiency in tax within the meaning of section 273 of the Revenue Act of 1924, and such order is herewith affirmed. See .

The petitioner was incorporated as a building and loan association on March 31, 1891, under sections 9643 to 9675, inclusive, of the General Code of the State of Ohio. It contends that it is exempt from taxation for the year 1921, under section 231(4) of the Revenue Act of 1921.

The Revenue Act of 1921, the effective date of which, so far as herein material, was January 1, 1921, provides:

SEC. 231. That the following organizations shall be exempt from taxation under this title -

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(4) Domestic building and loan associations substantially all the business of which is confined to making loans to members; and cooperative banks without capital stock organized and operated for mutual purposes and without profit; * * *

The evidence discloses that after November 23, 1921, the date of passage of the Revenue Act of 1921, the petitioner ceased making loans to nonmembers. Of the total loans outstanding during the year 1921, at least 70 per cent of such were made to nonmembers or nonstockholders of petitioner, and at least 70 per cent of the petitioner's income for the year 1921 was derived from loans made to nonmembers or nonstockholders of the petitioner. The total loans made by the petitioner during 1921 amounted to $1,437,490, of which $835,400 represented loans made to nonmembers or nonstockholders between the dates of January 1, 1921, and November 23, 1921, and the remainder, $602,090, represented loans made to members or stockholders during the entire year 1921.

The evidence discloses that loans issued by the petitioner have varied in length from one to fifteen years, and the outstanding loans as of December 31, 1921, reflected unpaid or parts of unpaid loans made from about 1906 to 1921.

In , we stated:

When Congress, in these acts levying income taxes, consistently granted to building and loan associations a favored position among other corporations, we have no doubt it did so on account of what it regarded as the well known and universally recognized peculiar characteristic of these organizations, and the legislative mind appears to have had no doubt that the plain lines of distinction between building and loan associations and other corporations would be found to be so apparent that there would be little, if any, difficulty, in distinguishing those organization exempt from those organizations upon which corporate income and profits taxes were levied.

* * *

It thus appears that all the authorities agree that the distinguishing feature characteristic of building and loan associations is the substantial mutuality of benefit or its reverse existing between all members of each association, and that Congress in all of the Acts of 1909 to 1921 has granted an exemption from income and profits taxation only to those associations organized for mutual benefit or mutual purposes; that all of the authorities above cited agree that some measure of departure, like the borrowing of funds from nonmembers or the making of loans to nonmembers, when done merely as an incident to the general purpose of the organization, does not defeat the exemption.

In , in discussing the characteristics of a building and loan association we stated:

But the mutuality peculiar to building and loan associations is not confined alone to the participation of the members in sharing profits and losses. Such mutuality pertains also to the members of an ordinary commercial partnership or association, and to the stockholders of an ordinary corporation engaged in a business enterprise for profit, the income of which is subject to tax. The mutuality essential to a building and loan association must include not only a mutuality of right with respect to the control of the association, and a mutuality with respect to the assets of the association, but its primary design must be that of an instrumentality of mutual helpfulness among its members in saving and borrowing for home owning. .

* * *

The fact that a corporation calls itself a building and loan association, or that it operates as such under the laws of a State, is not determinative of its true character. If the mutuality requisite to a building and loan association is lacking, it is not entitled to exemption from the Federal income tax.

The Revenue Act of 1921 governs the present proceeding and the fact that the petitioner made no loans to nonmembers ofter the date of its passage does not affect the case. Throughout the year 1921, the petitioner made loans in the total amount of $1,437,490, of which $835,400, or about 58.11 per cent, represented loans to nonmembers or nonstockholders. We must hold that the petitioner lacked the mutuality which is an attribute of a building and loan association.

It will be observed that section 231(4) of the Revenue Act of 1921, hereinbefore quoted, provides that domestic building and loan associations shall be exempt from taxation if substantially all of the business is confined to making loans to members.

We are satisfied that where, as in this proceeding, over 58 per cent of the loans made throughout the year were to nonmembers or nonstockholders, "substantially all of the business" was not confined to making loans to members.

We must hold that the petitioner is not entitled to exemption from taxation under the Revenue Act of 1921.

Judgment will be entered for the respondent.