*915 The petitioner was organized and operated under the laws of Virginia as an industrial loan association and during the taxable years was not a bank within the meaning of section 104 of the Revenue Act of 1936.
*1030 This proceeding involves the redetermination of the following deficiencies in income and excess profits taxes for 1936 and 1937:
| Income tax | Excess profits tax | |
| 1936 | $3,597.73 | $86.85 |
| 1937 | 2,712.91 | 52.92 |
The issue is whether petitioner is a bank within the meaning of section 104 of the Revenue Act of 1936.
FINDINGS OF FACT.
The petitioner, a corporation, was organized in December 1930 under the laws of Virginia with a maximum and minimum capital stock of $150,000 and $100,000, respectively. It has its principal place of business in Staunton, Virginia.
The petitioner's certificate of incorporation reads, to the extent material here, as follows:
This is to certify that the undersigned do hereby associate themselves together to establish a corporation under and by virtue of the provisions and subject to*916 the requirements of the law for such cases made and provided in Chapters 147 and 148 of the Code of Virginia, 1919 and acts amendatory thereto, for the purpose and under the corporate name hereinafter mentioned; and to *1031 that end, we do, by this, our Certificate of Incorporation, and in accordance with the requirements of the above-mentioned statutes, set forth the following:
I. The name of the Corporation shall be Staunton Industrial Loan Corporation. II. The principal office of the Corporation shall be located in the City of Staunton, Virginia. III. The purposes for which it is formed are as follows:(1) To carry on, transact and conduct a general industrial loan business under and in pursuance to the provisions of an act of the General Assembly of Virginia of 1920, and acts amendatory thereto, entitled: "To encourage thrift and savings amongst industrial classes similar to the encouragement afforded by building and loan associations for the purpose of making small loans to industrial classes on security and at a low rate of interest", known as House Bill No. 112, enacted as an emergency measure and approved on the 21st day of February 1920, and various acts*917 from time to time enacted by the General Assembly amending, repealing or modifying said House Bill No. 112, and as authorized therein, in addition to the general powers conferred upon corporations under the provisions of Chapter 147 of the Code of Virginia, 1919, shall have the power to lend money to any person, firm or corporation, to be repaid in periodical weekly, monthly or other installments, secured by the obligation of such person, firm or corporation, or by any other security, provided, however, no loan shall be made for a longer period than ten years nor for a greater amount in the aggregate to any person, firm or corporation than 20% of the paid in capital stock and surplus.
(2) To charge in advance the legal rate of interest upon the entire amount of the loan, and such loans to be repaid in weekly, monthly or other periodical installments with the privilege to the Corporation to declare the entire unpaid balance due and payable, and collect the same, in the event of default in the payment of any installment for a period of thirty days and to have the privilege of charging an investigation fee not exceeding 2% of the amount of the loan.
(3) And further to impose such*918 fines as may be fixed by it's by-laws for the non-payment of any installment of a loan, which fine shall not be in the excess of 10% of the amount of the payment in which default is made, and shall not be cumulative;
(4) To sell certificates of investment or similar obligations upon either the fully paid or partial payment system, and to pay thereon such rate of interest as may be fixed by it's by-laws.
(5) To have and exercise all the powers, authority and privileges granted and allowed to industrial loan associations under the provisions of the said act and to be subject to all restrictions, obligations and duties imposed thereon by the said act and acts amendatory thereto.
(6) To exercise all the general powers conferred by law upon corporations; to borrow money, to sell and dispose of notes, bonds, certificates of investment and other evidences of indebtedness, and to do any and all things pertaining to or incident to the transaction of any and all matters and things aforesaid, which may and can be legally done.
(7) To purchase or otherwise acquire, hold, own, sell, pledge, or otherwise dispose of shares of the capital stock and evidence of debt created andissued*919 by any other corporation, company or association, and if and while the owner thereof, to exercise all the rights and privileges of owners, including the right to vote any shares of stock so acquired and held, and to purchase or acquire shares of it's own stock.
(8) To do all and everything necessary, suitable, convenient or proper for the accomplishment of any of the purposes or attainment of any one or more of the objects herein enumerated, or incidental to the powers herein named, which *1032 shall at any time appear conducive or expedient for the accomplishment of any of the purposes, or the attainment of any of the objects herein enumerated.
(9) The enumeration of certain powers as herein specified is not intended and shall not be construed as exclusive or as a waiver of any of the powers, rights and privileges granted or conferred on corporations of this character by the laws of the State of Virginia as now, or hereafter in force; and generally the corporation shall be authorized to exercise and enjoy all of the powers, rights and privileges conferred on or granted to corporations of like character by the laws of the State of Virginia as now in force or hereafter*920 amended orenacted.
IV. The maximum amount of the capital stock of the said corporation shall be One Hundred Fifty Thousand ($150,000.00) Dollars, and the minimum amount shall be One Hundred Thousand ($100,000.00) Dollars; and the capital stock of the corporation shall be divided into shares with a par value of Ten ($10.00) Dollars per share. V. The period for the duration of the corporation shall be unlimited. VI. The Board of Directors shall have the power to make, alter, amend or repeal By-Laws for the corporation subject always to the alteration, repeal or amendment by the stockholders. VII. The corporation shall have the authority to purchase or otherwise acquire, or to guarantee or to become surety in respect to the stock, bonds, or other securities and obligations of similar or subsidiary companies, either or both, and in addition to establish, promote or organize, maintain and operate similar companies in such towns, cities and states as may be desired by the said corporation.The certificate has never been modified.
The petitioner accepts funds at interest from the public, including banks, and as evidence thereof issues certificates of investment or enters*921 the amount in a passbook held by the customer, depending upon whether the amount is a final payment or an installment payment. The term "Certificate of Investment" appearing on the certificates was used to comply with statutes and regulations of Virginia governing industrial loan associations. Printed slips are used by customers to make deposits. The certificates of investment and passbooks used by petitioner contain notices of a right reserved by petitioner to require 30 and 60 days notice, respectively, of withdrawal of funds. The petitioner does not accept checks drawn on accounts in other institutions and it has no authority to accept deposits subject to check. Money paid to petitioner for the purchase of certificates of investment may be withdrawn at its place of business upon the presentation by the customer, properly executed, of a negotiable form of check furnished by petitioner for that purpose. These checks do not circulate like checks drawn on ordinary checking accounts, but if one of them, contrary to petitioner's regulations, were drawn by a customer payable to other than petitioner, it would be honored by the petitioner when presented by the endorsee at petitioner's*922 place of business. Petitioner does not require its investors to present their passbooks when withdrawing funds from their accounts. Passbooks are used for the convenience of investors. Petitioner issues temporary *1033 receipts when amounts are deposited or withdrawn by an investor without his passbook. Such deposits and withdrawals are subsequently posted in the passbooks. The petitioner also accepts deposits in Christmas savings club accounts. Payments by petitioner of balances in the accounts are made by check. The rate of interest paid by petitioner on deposits is determined by its board of directors.
The petitioner makes loans to anyone having acceptable credit or collateral. In 1936 it made several loans secured by its own stock. Loans are evidenced by printed forms of notes signed by the borrower. The petitioner does not have power to make loans for periods longer than ten years. Borrowers at times repay loans by weekly, monthly, or semiannual installments. Petitioner imposes fines for defaults on loans. Its income is derived solely from loans. The business of petitioner consists of receiving investments and making loans and discounts.
The petitioner*923 has never been short of cash and has always allowed withdrawals of funds without notice.
The words "Investment Department" appear on the face of petitioner's passbooks, which contain rules and regulations subject to which investments are received by petitioner. Pursuant to the statutes of Virginia and regulations governing industrial loan associations, the holder of the books is referred to in the rules and regulations as "investor" and the amounts turned over to the petitioner are referred to therein as "investments," except in one instance, when the word "deposits" is used.
The books of petitioner are audited at least once each year by an examiner from the office of the banking department of the Corporation Commission of Virginia. Commercial banks incorporated under the laws of Virginia are supervised by the same department. The report rendered on an examination made of petitioner's business as of the close of business March 7, 1936, discloses "deposits" of $298,639.40, consisting of the following items:
| Certificate of investment (full paid) | $17,000.00 |
| Installment certificate of investment | 277,320.40 |
| Christmas savings club | 4,319.00 |
The examiners require*924 petitioner to charge off all assets listed as worthless and to set up a 50 percent reserve for accounts listed as doubtful and otherwise comply with suggestions made in their reports. The CorporationCommission of Virginia requires petitioner to render a report of its affairs and to publish the report in a newspaper whenever it issues a like call upon state banks. The amounts turned over to petitioner by its customers are called "Investments" in the statement of its condition issued by the petitioner on December 31, 1937.
*1034 In 1932 petitioner was informed by counsel for the Federal Reserve Bank at Richmond, Virginia, that it was eligible for membership in the Federal Reserve System. Petitioner is not a member of the Federal Reserve System. It does not act and does not have the power to act as fiduciary or trustee.
The petitioner has fourteen directors, who meet once a month. The directors have charge of the operation of petitioner's business. An executive committee, consisting of six directors, meets weekly, or oftener if necessary, to pass upon applications for loans, and directs the activities of petitioner for the board of directors.
OPINION.
DISNEY: *925 In his determination of the deficiencies the Commissioner held that the petitioner was not a bank within the meaning of section 104 of the Revenue Act of 1936 and accordingly applied the surtax provisions of the statute to the undistributed net income of the petitioner each taxable year. The question is whether petitioner comes within the definition of a bank in section 104, supra.
Section 104(b) of the applicable revenue act provides for the taxation of banks in the same manner as other corporations, except that they shall not be subject to the surtax imposed by section 14 and the rate of normal tax shall be 15 per centum instead of the rates provided in section 13. Section 104 (a) provides:
As used in this section the term "bank" means a bank or trust company incorporated and doing business under the laws of the United States (including laws relating to the District of Columbia), of any State, or of any Territory, a substantial part of the business of which consists of receiving deposits and making loans and discounts, or of exercising fiduciary powers similar to those permitted to national banks under section 11(k) of the Federal Reserve Act, as amended, and which is subject*926 by law to supervision and examination by State or Federal authority having supervision over banking institutions.
The petitioner contends that the term "bank" was used in section 104 by Congress in its commonly accepted sense and is not confined to banks organized under the banking laws of Virginia. It makes no contention that it is a trust company and the proof is clear that it did not exercise fiduciary powers. Respondent contends that petitioner was neither formed nor doing business as a "bank" under the laws of Virginia and therefore does not meet the test set forth in the revenue act. The contention of petitioner will be considered first.
The term "bank" as used in section 104 means "a bank * * * incorporated and doing business under the laws of * * * any State." Sec. 104(a), supra. The section is an exemption from the surtax provisions applicable to corporations in general and should be strictly construed. It does not apply to all banks so organized, but only to those a substantial part of the business of which consists *1035 of receiving deposits and making loans and discounts. Petitioner's power to receive money from customers was limited to the proceeds*927 of sale of certificates of investment or similar obligations. Its charter contains no right to accept deposits, subject to checks or otherwise, as banks are authorized to do. That is one of the chief distinctions between petitioner and a bank.
To support his argument, petitioner refers to rports of committees of Congress. In its report on the Revenue Act of 1936, the Committee on Ways and Means said:
Banks and trust companies are not brought within the new plan, but pay a flat rate of tax of 15 percent on their net income and domestic corporations in receivership are treated in the same manner. This seems to be a wise public policy, since the surplus of banks must be built up for the protection of the depositors and because receiverships in the vast majority of cases cannot, of course, pay dividends. For similar reasons there is a flat tax of 15 percent on the net income of all insurance companies whether domestic or foreign.
The report of the Committee on Finance, Report No. 2156, p. 13, contains no additional light on the intent of the section. These reports merely disclose the reason for the exemption and contain nothing to show that the committees intended the term*928 "bank" to embrace more than the definition in the statute. We conclude that to be entitled to the benefits of section 104 petitioner must show that it was organized and doing business as a bank under the laws of Virginia. Was it such an institution during the taxable years?
State banks of Virginia are defined in and regulated by the provisions of chapter 164-A of the Virginia Code of 1936, known as the Banking Code. Virginia corporations organized to conduct an industrial loan business are regulated by the provisions of chapter 166-A, relating to industrial loan associations. The statutes of Virginia make a clear distinction between the two classes of corporations. The term "bank", as used in chapter 164-A, includes "banks of deposit and discount, savings banks, savings societies, savings institutions and trust companies." Sec. 4149(1). Corporations not lawfully engaged in the banking business may not use an office sign indicating thereon that such place is the office of a bank or use, among other things, letterheads having thereon any word indicating that such business is the business of a bank. Sec. 4149(4). No bank may acquire shares of its own stock except as a protection*929 against loss from debts previously contracted. Sec. 4149(13). No bank may pay interest on deposits or certificates of deposits in excess of 4 percent per annum. Sec. 4149(25). The total liability of any person to a bank shall at no time exceed 15 per centum of the capital and permanent surplus of the bank. Sec. 4149(47). Section 4149(73), enacted in 1928, provides that "No bank shall hereafter be *1036 granted in its charter, or in any amendments thereto, authority to do business as an industrial loan association. No industrial loan associations shall hereafter be granted authority in its charter, or in any amendment thereto, to do a banking business, and no such association shall, except as hereinafter provided, hereafter be granted in its charter, or in any amendment thereto, the right to have in its title the word 'bank,' 'banking,' 'savings' or 'trust' or any words tending to indicate that it is permitted to do a banking business in Virginia."
Chapter 166-A provides that corporations for conducting an industrial loan business may be formed under chapter 147 of the Code of Virginia and shall be subject to all the restrictions and shall have all the general powers*930 set forth in the chapter, except as otherwise provided in chapter 166-A. The statute then provides that every association shall have as part of its title the words "industrial loan which shall not be used disjunctively." Sec. 4168(2). Industrial loan associations may loan money, repayable in periodical installments secured by the obligation of the borrower or other security, but no loan shall be for a longer period than ten years or at an amount exceeding 20 percent of the paid-in capital stock and surplus of the association. Sec. 4168(5). They may charge in advance the legal rate of interest upon the entire amount of the loan (Sec. 4168(6)) and impose fines not in excess of a specified amount for failure of the borrower to pay any installment of the loan. Sec. 4168(7). Power is granted in section 4168(8) to sell certificates of investment or similar obligations upon either the fully paid or partial payment plan and pay interest hereon at rates provided for in their certificates of incorporation or bylaws. Section 4168(10) gives the State Corporation Commission supervision of all industrial loan associations, with directions to examine their affairs at least once a year. The*931 same commission exercise like jurisdiction over banks. Sec. 4149(52). Section 4168(11 1/2)(e), enacted in 1936, provides that any industrial loan association theretofore chartered with power to operate a bank of discount and deposit which actually does business only as an industrial loan association shall not be subject to section 4149(25), the provisions of which regulate the maximum amount of interest payable on bank deposits.
It appears from the statutes just referred to that industrial loan associations organized and doing business thereunder have nothing more than some of the characteristics of a bank, as defined therein. The statutes not only provide for the formation of the institutions under different chapters of the Banking Code, but specifically provide that an industrial loan association shall not do business or hold itself out as doing business as a bank. The powers of banks and corporations doing an industrial loan business differ in respect to *1037 loans and interest payments. No bank may make a loan in excess of 15 percent of its capital and permanent surplus, but an industrial loan corporation may make a loan up to 20 percent of its capital and surplus. *932 Interest paid by banks is regulated by statute. Petitioner had power to determine its own rate of interest. Petitioner's charter authorized it to impose fines upon borrowers for defaults on any installment of a loan. State banks of Virginia do not seem to have such power. The charter of petitioner also empowered it to buy and sell, and exercise the rights and privileges of owners of, securities of other corporations. The powers of state banks in that respect are limited. Sec. 4149(13). The distinction was definitely recognized by the General Assembly of Virginia in 1934. It declared that "The objects of an industrial loan association and a bank are hereby declared to be similar in nature" and authorized industrial loan associations chartered prior to January 1, 1934, to amend their charters to become "a bank of discount and deposit and/or a trust company" and retain the right to conduct the business of an industrial loan association. Sec. 4168(37)(c). Petitioner never took advantage of the privilege granted by the act. The act was repealed in 1936. The petitioner was not incorporated and doing business as a bank under the laws of Virginia.
From the conclusions reached*933 it follows that the respondent committed no error in refusing to classify petitioner as a bank within the meaning of section 104 of the Revenue Act of 1936.
Reviewed by the Board.
Decision will be entered for the respondent.