1928 BTA LEXIS 3673">*3673 Petitioner held not a building and loan association entitled to exemption from taxation during the years 1918, 1919 and 1920, within the meaning of section 231(4) of the Revenue Act of 1918.
11 B.T.A. 989">*990 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1918, 1919 and 1920, in the total amount of $8,533.40.
The error assigned is the holding of the respondent that the petitioner, during the years in controversy, was not a building and loan association within the meaning of the Revenue Act of 1918, and therefore not entitled to be exempt from the payment of such taxes.
FINDINGS OF FACT.
The petitioner is a corporation organized on March 2, 1897, under the laws of the State of Ohio.
The constitution of the petitioner provides:
This company is organized for the purpose of raising money to be loaned to its members and others, and for such other purposes as are authorized by law.
The loans made by the petitioner to members or stockholders and to nonmembers or nonstockholders during the years1928 BTA LEXIS 3673">*3674 1918, 1919 and 1920 are shown by the following schedule (real estate mortgages only):
| Year. | Members or stockholders. | Nonmembers or nonstockholders. | Total. |
| 1918 | $60,825.00 | $71,370.00 | $132,195.00 |
| 1919 | 358,100.00 | 293,340.00 | 651,440.00 |
| 1920 | 318,225.00 | 120,585.00 | 438,810.00 |
| Total | 737,150.00 | 485,295.00 | 1,222,445.00 |
| Per cent | 60.3 | 39.7 | 100 |
On December 31, 1920, the petitioner had loans outstanding which had been made to members or stockholders and nonmembers or nonstockholders in the amount of $1,170,818.08, of which amount $652,103.31 represented loans made to members or stockholders and $518,714.77 represented loans made to nonmembers or nonstockholders.
All deposits received by the petitioner during the years 1918, 1919 and 1920, were deposits made by nonmembers or nonstockholders and are shown by the following schedule:
| Year 1918, deposits by nonmembers or nonstockholders | $268,522.83 |
| Year 1919, deposits by nonmembers or nonstockholders | 579,592.47 |
| Year 1920, deposits by nonmembers or nonstockholders | 566,576.06 |
On all deposits received by the petitioner from nonmembers or nonstockholders the petitioner paid interest1928 BTA LEXIS 3673">*3675 at the rates varying from 4 to 5 per cent.
The petitioner charged interest on loans made, whether to members or stockholders or to nonmembers or nonstockholders, at the rate of 6 to 6 1/2 per cent.
11 B.T.A. 989">*991 Of the total loans outstanding during each of the years 1918, 1919 and 1920 at least 45 per cent of said loans were made to nonmembers or nonstockholders of the petitioner and at least 45 per cent of the petitioner's income for each of the years 1918, 1919 and 1920 was derived from loans made to nonmembers or nonstockholders.
The loans made by the petitioner to members or stockholders during the years 1918, 1919 and 1920 on the petitioner's stock and on securities other than stock or mortgages were respectively as follows: 1918, $5,375 and $648; 1919, $19,645 and $2,150; and 1921, $23,745.
The assets and liabilities of the petitioner as shown by its books at December 31 of each of the years in question were as follows:
| 1918. | |
| ASSETS. | |
| Cash on hand | $45,264.24 |
| Loans on mortgage security | 932,536.76 |
| Loans on stock, certificates, or pass-book security | 4,000.00 |
| Loans on all security | 3,199.19 |
| Furniture and fixtures | 2,900.00 |
| Real estate | 2,241.47 |
| Real estate sold on contract | 3,505.65 |
| Due from borrowers for insurance and taxes | 200.66 |
| War savings stamps | 6,905.00 |
| War stamps, documentary | 380.16 |
| Total | 1,001,133.13 |
| LIABILITIES. | |
| Running stock and dividends | 358,405.34 |
| Credits on mortgage loans | 117,794.38 |
| Paid up stock and dividends | 75,586.47 |
| Deposits and accrued interest | 415,323.43 |
| Reserve fund | 20,000.00 |
| Undivided profit fund | 3,597.49 |
| Due borrowers on unfinished buildings | 426.02 |
| Deposits from other building and loan associations | 10,000.00 |
| Total | 1,001,133.13 |
| 1919. | |
| ASSETS. | |
| Cash on hand | $38,261.82 |
| Loans on mortgage security | 1,056,205.21 |
| Loans on stock, certificates, or pass-book security | 4,150.00 |
| Loans on all security | 1,340.55 |
| Furniture and fixtures | 2,400.00 |
| Real estate sold on contract | 669.95 |
| Due from borrowers for insurance and taxes | 25.08 |
| Bonds | 5,000.00 |
| Total | 1,108,052.61 |
| LIABILITIES. | |
| Running stock and dividends | $366,589.40 |
| Paid-up stock and dividends | 67,099.02 |
| Deposits and accrued interest | 612,755.54 |
| Reserve fund | 25,000.00 |
| Undivided profit fund | 5,684.18 |
| Due borrowers on unfinished buildings | 30,924.47 |
| Total | 1,108,052.61 |
| 1920. | |
| ASSETS. | |
| Cash on hand | $56,862.23 |
| Loans on mortgage security | 1,165,193.08 |
| Loans on stock, certificates, or pass-book security | 5,625.00 |
| Furniture and fixtures | 2,000.00 |
| Real estate sold on contract | 552.76 |
| Bonds | 5,000.00 |
| Total | 1,235,233.07 |
| LIABILITIES. | |
| Running stock and dividends | 417,260.35 |
| Paid-up stock and dividends | 67,028.96 |
| Deposits and accrued interest | 699,416.04 |
| Reserve fund | 30,000.00 |
| Undivided profit fund | 7,727.15 |
| Due borrowers on unfinished buildings | 13,800.57 |
| Total | 1,235,233.07 |
1928 BTA LEXIS 3673">*3676 11 B.T.A. 989">*992 During 1918, 1919, and 1920 the petitioner was a member of the Ohio League of Building & Loan Associations and had been a member of such since the inception of the league. It has always filed reports with the superintendent of the league, has been regularly inspected by the league each year, and has had regular annual meetings.
In 1921 or 1922 the collector of internal revenue at Columbus, Ohio, called upon the petitioner for returns for the years in question. Prior to that time petitioner had not filed returns for those years and had not been called upon to make returns.
The petitioner during the years in controversy maintained no checking accounts, loaned no money on indorsed notes without any security, made no loans to members or others on any security other than first mortgage real estate or stock held by the person (except for a few loans on Liberty bonds to members in 1918 and 1919), never accepted any commercial drafts or bills of exchange, never acquired the stock of any other corporation, never made a loan to a nonmember in preference to a member, and never declared a dividend to any person other than a member of petitioner.
11 B.T.A. 989">*993 The petitioner1928 BTA LEXIS 3673">*3677 paid 4 and 5 per cent on deposits and made loans at a higher rate than this, the profits accruing for the benefit of the members only.
In compliance with the laws of Ohio, the petitioner during the three years in controversy maintained a reserve fund of not less than 5 per cent of its net earnings.
During the years in controversy the petitioner issued both paid-up and running stock, both classes of which carried voting privileges. The petitioner had no permanent or nonwithdrawable stock. If stock of either class is surrendered, the petitioner has the right to reissue it to someone else. The petitioner's authorized capital during the three years in controversy was $5,000,000.
The loans made by petitioner run from 3 years to about 10 years and 8 months. Of the loans outstanding on the petitioner's books as of December 31, 1918, there is reflected parts of loans made as early as 1908; for 1919 loans made as early as 1909; for 1920, loans made as early as 1910; and in each case loans were made in each succeeding year thereafter up to the years in question.
OPINION.
SIEFKIN: The petitioner in this proceeding contends that during the years 1918, 1919, and 1920 it was a1928 BTA LEXIS 3673">*3678 building and loan association within the meaning of section 231(4) of the Revenue Act of 1918 and was, therefore, entitled to exemption from Federal taxation.
The Revenue Act of 1918 provides:
SEC. 231. That the following organizations shall be exempt from taxation under this title -
* * *
(4) Domestic building and loan associations and cooperative banks without capital stock organized and operated for mutual purposes and without profit; * * *
We have heretofore in , construed the above section. In that case we denied exemption to the association because it had so far departed from the practice of building and loan associations that it could not be classed as such. In that case 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 loan1928 BTA LEXIS 3673">*3679 associations and other corporations would be found to be so apparent that there would be little, if any, difficulty, in distinguishing those organizations exempt from those organizations upon which corporate income and profits taxes were levied.
* * *
It 11 B.T.A. 989">*994 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 participation1928 BTA LEXIS 3673">*3680 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.
As pointed out hereinbefore, 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 organization1928 BTA LEXIS 3673">*3681 does not defeat the exemption. The question then arises as to whether the petitioner in the instant proceeding in making loans to and borrowing money from nonmembers did so incidentally in the conduct of the business of a building and loan association.
The evidence discloses that during 1918 loans were made to members or stockholders in the amount of $60,825, and to nonmembers or nonstockholders in the amount of $71,370; in 1919, to members $358,100, and to nonmembers $293,340; and in 1920, to members $318,225, and to nonmembers $120,585.
All deposits received by petitioner during the years 1918, 1919, and 1920, were deposits made by nonmembers or nonstockholders and were in the following amounts:
| 1918 | $268,522.83 |
| 1919 | 579,592.47 |
| 1920 | 566,576.06 |
We must conclude that the business transacted by the petitioner with nonmembers or nonstockholders during the years 1918, 1919, and 1920 was not merely incidental to the conduct of a true building 11 B.T.A. 989">*995 and loan association, and that the petitioner lacked the mutuality ordinarily attributable to a building and loan association as referred to in the Revenue Act of 1918.
We accordingly hold that it is not1928 BTA LEXIS 3673">*3682 entitled to exemption from taxation under that Act.
Judgment will be entered for the respondent.