*3566 Petitioner held not a building and loan association entitled to exemption from taxation during the years 1918, 1919, 1920, 1921, 1922, and 1923 in the meaning of section 231(4) of the Revenue Acts of 1918 and 1921.
*289 This is a proceeding for the redetermination of deficiencies in income and profits taxes for the calendar years 1918 to 1923, inclusive. The total amount of taxes in controversy is $50,216.41, and results from deficiencies in tax for the years 1918, 1921, and 1922 in the amount of $466.53, and a rejection of claims for abatement for the years 1918 to 1923, inclusive, in the total amount of $49,749.88.
The error assigned is the holding of the respondent that the petitioner, during the years in controversy, was not a domestic building and loan association within the meaning of the Revenue Acts of 1918 and 1921, and was not entitled to be exempt from the payment of such tax.
FINDINGS OF FACT.
The petitioner was incorporated December 20, 1894, under the laws of the State of Ohio. Its principal office is at Zenia, Ohio.
The*3567 constitution and by-laws of the petitioner provide that:
This company is organized for the purpose of raising money to be loaned among the members thereof and others, and for such other purposes as are authorized by law.
* * *
SEC. 21. Members and special depositors, whose stock or deposits are not pledged to this Company, may, as a general rule, upon written application to the Secretary, withdraw all or any part of their stock, etc. * * *
The petitioner's balance sheets at the end of each of the years in controversy show the following assets and liabilities:
| December 31, 1918 | |
| Assets | |
| 1. Cash on hand | $108,992.93 |
| 2. Loans on mortgage security | 1,404,253.14 |
| 3. Loans on stock, certificates or pass-book security | 5,779.25 |
| 4. Loans on all other security | 47,225.00 |
| 5. Furniture and fixtures | 900.00 |
| 6. Real estate | 1,250.00 |
| 7. Real estate sold on contract | $8,184.00 |
| 8. Due from borrowers for insurance and taxes | 349.47 |
| 10. Bonds | 101,490.00 |
| 14. War savings stamps | 71.91 |
| Total | 1,678,495.70 |
| Interest due and uncollected | 777.25 |
| Liabilities | |
| 1. Running stock and dividends | $1,101,152.30 |
| 4. Credits on real estate sold on contract | 1,141.75 |
| 5. Paid-up stock and dividends | 22,145.00 |
| 7. Deposits and accrued interest | 499,233.05 |
| 9. Reserve fund | $45,900.00 |
| 10. Undivided profit fund | 8,923.60 |
| Total | 1,678,495.70 |
| Interest due and uncollected | 777.25 |
| december 31, 1919 | |
| assets | |
| 1. Cash on hand | $107,196.45 |
| 2. Loans on mortgage security | 1,743,831.55 |
| 3. Loans on stock, certificates or pass-book security | 9,944.23 |
| 4. Loans on all other security | 25,025.00 |
| 5. Furniture and fixtures | 700.00 |
| 6. Real estate | 1,250.00 |
| 7. Real estate sold on contract | 7,434.00 |
| 8. Due from borrowers for insurance and taxes | 287.07 |
| 9. Bonds | 106,430.00 |
| 10. Deposits in other building and loan associations | 20,000.00 |
| Total | 2,022,098.30 |
| Interest due and uncollected | 361.72 |
| Liabilities | |
| 1. Running stock and dividends | $1,154,690.90 |
| 2. Credits on real estate sold on contract | 1,217.93 |
| 3. Paid-up stock and dividends | 20,703.00 |
| 7. Deposits and accrued interest | 782,042.65 |
| 8. Reserve fund | 49,500.00 |
| 9. Undivided profit fund | 13,943.82 |
| Total | 2,022,098.30 |
| Interest due and uncollected | 361.72 |
| December 31, 1920 | |
| Assets | |
| 1. Cash on hand | $94,446.99 |
| 2. Loans on mortgage security | 1,827,141.77 |
| 3. Loans on stock, certificates, or pass-book security | 13,209.61 |
| 4. Loans on all other security | 4,929.92 |
| 5. Furniture and fixtures | 4,500.00 |
| 6. Real estate | 250.00 |
| 7. Real estate sold on contract | 7,184.00 |
| 8. Due from borrowers for insurance and taxes | 452.07 |
| 9. Bonds | 103,290.00 |
| 10. Deposits in other building and loan associations | 25,000.00 |
| Total | 2,303,672.06 |
| Interest due and uncollected | 477.89 |
| Liabilities | |
| 1. Running stock and dividends | $1,340,609.48 |
| 2. Credits on real estate sold on contract | 1,308.24 |
| 3. Paid-up stock and dividends | 17,407.00 |
| 4. Deposits and accrued interest | 647,434.92 |
| 5. Reserve fund | 53,300.00 |
| 6. Undivided profit fund | 18,907.01 |
| 7. Christmas savings club | 1,437.71 |
| Total | 2,080,404.36 |
| Interest due and uncollected | 477.89 |
| December 31, 1921 | |
| Assets | |
| 1. Cash on hand | $98,402.64 |
| 2. Loans on mortgage security | 1,797,247.94 |
| 3. Loans on stock, certificates, or pass-book security | 7,434.18 |
| 4. loans on all other security | 4,500.00 |
| 5. Furniture and fixtures | 4,000.00 |
| 6. Real estate sold on contract | 7,825.00 |
| 7. Due from borrowers for insurance and taxes | 1,200.24 |
| 8. Bonds | 102,150.00 |
| 9. Deposits in other building and loan associations | 5,000.00 |
| Total | 2,027,760.00 |
| Interest due and uncollected | 5,110.53 |
| Liabilities | |
| 1. Running stock and dividends | $1,380,862.19 |
| 2. Credits on real estate sold on contract | 1,091.45 |
| 3. Paid-up stock and dividends | 15,862.00 |
| 4. Deposits and accrued interest | 529,125.89 |
| 5. Reserve fund | 58,200.00 |
| 6. Undivided profit fund | 23,756.87 |
| 7. Borrowed money and accrued interest | 10,000.00 |
| 8. Contingent profit on real estate sold on contract | 641.00 |
| 9. Deposits from other building and loan associations | 5,000.00 |
| 10. Christmas savings club | 3,220.60 |
| Total | 2,027,760.00 |
| Interest due and uncollected | 5,110.53 |
| December 31, 1922 | |
| Assets | |
| 1. Cash on hand | $96,559.67 |
| 2. Loans on mortgage security | 1,873,833.96 |
| 3. Loans on stock, certificates or pass-book security | 9,072.25 |
| 4. Loans on all other security | 1,095.00 |
| 5. Furniture and fixtures | 2,500.00 |
| 6. Real estate sold on contract | 5.975.00 |
| 7. Due from borrowers for insurance and taxes | 1,384.10 |
| 10. Bonds | 33,550.00 |
| 11. Deposits in other building and loan associations | 5,000.00 |
| 12. War Savings stamps | 18,388.75 |
| Total | 2,047,358.73 |
| Interest due and uncollected | 4,915.02 |
| Liabilities | |
| 1. Running stock and dividends | $1,389.924.37 |
| 2. Credits on real estate sold on contract | 1,493.80 |
| 3. Paid-up stock and dividends | 15,347.00 |
| 4. Deposits and accrued interest | 512,644.46 |
| 5. Reserve fund | 62,500.00 |
| 6. Undivided profit fund | 34,568.29 |
| 7. Borrowed money and accrued interest | 10,000.00 |
| 8. Contingent profit on real estate sold on contract | 391.00 |
| 9. Deposits from other building and loan associations | 15,000.00 |
| 10. Christmas savings club | 5,489.81 |
| Total | 2,047,358.73 |
| Interest due and uncollected | 4,915.02 |
| December 31, 1923 | |
| Assets | |
| 1. Cash on hand | $47,805.62 |
| 2. Loans on mortgage security | 2,196,486.32 |
| 3. Loans on stock, certificates or pass-book security | 8,755.80 |
| 4. Furniture and fixtures | 2,000.00 |
| 5. Real estate | 6,600.00 |
| 6. Real estate sold on contract | 5,975.00 |
| 7. Due from borrowers for insurance and taxes | 649.32 |
| 8. bonds | 30,400.00 |
| 9. Deposits in other building and loan associations | 5,000.00 |
| Total | 2,303,672.06 |
| Interest due and uncollected | 3,902.30 |
| Liabilities | |
| 1. Running stock and dividends | $1,499,175.93 |
| 2. Credits on real estate sold on contract | 1,606.99 |
| 3. Paid-up stock and dividends | 14,317.00 |
| 4. Deposits and accrued interest | 643,503.33 |
| 5. Reserve fund | 68,000.00 |
| 6. Undivided profit fund | 44,594.05 |
| 7. Borrowed money and accrued interest | 50,000.00 |
| 8. Contingent profit on real estate sold on contract | 391.00 |
| 9. Deposits from other building and loan associations | 25,000.00 |
| 10. Christmas savings club | 7,083.76 |
| Total | 2,303,672.06 |
| Interest due and uncollected | 3,902.30 |
*291 There were received, among other receipts, by the petitioner the following amounts from the sources and during the*3571 years indicated:
| Year | Deposits | Borrowed money | Deposits from other building |
| and loan associations | |||
| 1918 | $571,848.73 | $10,000.00 | $10,000.00 |
| 1919 | 920,196.43 | ||
| 1920 | 936,904.23 | 39,000.00 | |
| 1921 | 648,626.05 | 15,000.00 | 5,000.00 |
| 1922 | 570,582.77 | 16,000.00 | 10,000.00 |
| 1923 | 624,112.83 | 70,000.00 | 10,000.00 |
No evidence was submitted to show whether these receipts were from members or from nonmembers of the petitioner.
The petitioner made loans on mortgage security during the year 1918, in the amount of $371,028.98, of which $198,158.98 was made to *292 members or stockholders and the remainder, $172,870 was made to nonmembers or nonstockholders.
The petitioner made loans on mortage security in the year 1919, in the amount of $640,272.92, of which $354,490 was made to members or stockholders, and $285,782.92 of the loans was made to nonmembers or nonstockholders.
The petitioner made loans on mortgage security in the year 1920, in the amount of $490,293.47, of which $348,932, was made to members or stockholders and the remainder, $141,361.47, was made to nonmembers or nonstockholders.
The petitioner made loans on mortgage security during*3572 the year 1921, in the amount of $130,765.71, of which $92,260 was made to members or stockholders and the remainder, $38,505.71 was loans made to nonmembers or nonstockholders.
The petitioner made loans on mortgage security during the year 1922, in the amount of $386,506.21, of which $384,067.20 was made to members or stockholders and the remainder, $3,439.01 was made to nonmembers or nonstockholders.
All the loans made during the year 1923 were made to members or stockholders.
The rate of interest charged by the petitioner on loans made by the petitioner during the years 1918 to 1923, inclusive, varied from 7 to 8 per cent.
On December 31, 1920, the petitioner had outstanding loans on mortgage security of $1,827,141.77, of which $414,682.64 represented loans made to members or stockholders and the remainder $1,412,549.13 represented loans made to nonmembers or nonstockholders.
On December 31, 1921, the petitioner had outstanding loans on mortgage security of $1,797,247.94, of which $404,707.93 represented loans made to members or stockholders and the remainder, $1,392,540.01 represented loans made by the petitioner to nonmembers or nonstockholders.
On December 31, 1922, the*3573 petitioner had outstanding loans on mortgage security in the amount of $1,873,833.96, of which $712,646.59 represented loans made to members or stockholders and the remainder, $1,161,187.37 represented loans made by the petitioner to nonmembers or nonstockholders.
On December 31, 1923, the petitioner had outstanding loans on mortgage security in the amount of $2,196,486.32, of which $1,323,995.53 represented loans made to members or stockholders and the remainder, $872,490.79 represented loans made to nonmembers or nonstockholders.
The rate of interest charged by the petitioner on loans made during the years 1918 to 1923, inclusive, was the same whether made to members or stockholders or nonmembers or nonstockholders.
*293 During the year 1922, approximately 69 per cent of the petitioner's income was derived from loans made and outstanding during the year 1922, to nonmembers or nonstockholders based upon amount of loans outstanding at the end of the year.
During the year 1923, approximately 50 per cent of the petitioner's income was derived from loans made and outstanding during the year 1923, to nonmembers or nonstockholders based upon amount of loans outstanding*3574 at the end of the year.
The loans made during the years 1918 to 1923, inclusive, respectively, on stock and certificate pass books not included in mortgage loans were as follows:
| 1918 | $22,935.00 |
| 1919 | 21,353.00 |
| 1920 | 32,630.84 |
| 1921 | $17,824.00 |
| 1922 | 22,148.40 |
| 1923 | 21,880.33 |
During the years involved the bulk of the loans made to members or stockholders were loans for the purpose of building homes for their own occupancy. In regard to the loans made to nonmembers or nonstockholders during the years involved the bulk of them were for the purpose of building homes, but it is not known whether they were for the purpose of the occupancy of the borrower or to contractors for the purpose of constructing homes or dwelling places or for other purposes.
The petitioner, during the years in controversy, was a member of the Ohio State League of Building and Loan Associations, and has been a member thereof since the inception of the league. It filed annual reports to the superintendent of the league and was annually inspected by that officer.
For the years 1918, 1919, and 1920, petitioner was not called upon and did not file a return within the time provided by*3575 law for each of those years. It first filed a return in 1922, when it was requested to do so by the collector of internal revenue at Cincinnati, Ohio.
During the years 1918 to 1922, inclusive, petitioner never carried any commercial checking accounts, never accepted any bills of exchange or drafts, never made loans on promissory notes, indorsed, without security, never issued any letters of credit, never underwrote securities, never dealt in stock of other corporations, never bought or sold real estate except on foreclosure of mortgages which it held, never made loans except those secured by first mortgages on real estate or by stock of the petitioner, and never made a loan to a nonmember in preference to a member.
Petitioner maintained a reserve fund of at least 5 per cent of its net earnings each year, in compliance with the Ohio law. It accepted deposits and paid thereon 4, 5, and 6 per cent interest. Loans were then made on first mortgages on real estate at higher rates of interest.
*294 Dividends were paid to members of the petitioner only, and the depositors never received anything except the interest agreed upon when the deposits were made.
The petitioner*3576 issued running stock and paid-up stock, both classes of which carried voting privileges and the same rate of dividend. The petitioner had no permanent or nonwithdrawable stock. When stock of either kind was surrendered, it was reissued to someone else.
The petitioner held regular meetings once each year.
From November 23, 1921, to December 31, 1921, the petitioner made one loan to a nonmember. This was in the amount of $700 and was a loan upon a farm. During this same period the petitioner made a total of nine loans aggregating about $6,000.
The petitioner made no loans to nonmembers in 1923. The loans made by the petitioner averaged about 13 years in length.
The total loans outstanding on the books of the petitioner as of December 31 of each of the years 1918, 1919, 1920, 1921, and 1922, included, respectively, loans made as early as 1905, 1906, 1907, 1908, and 1909, and loans made in each successive year up to the year under consideration.
OPINION.
SIEFKIN: The sole question to be decided is whether the petitioner, during the years in controversy, was a domestic building and loan association, exempt from taxation under the Revenue Acts of 1917, 1918, and 1921.
*3577 During the year 1918, the petitioner made loans on mortgage security in the amount of $371,028.98, of which $198,158.98, or approximately 53.41 per cent, was to members or stockholders, and $172,870, or approximately 46.59 per cent, was to nonmembers or nonstockholders. During the year it also made loans to members on stock or pass-book security in the amount of $22,935. At December 31, 1918, there were outstanding loans in the amount of $1,404,253.14, but it is not shown what proportion of this represents loans made to members.
During the year 1919, the petitioner made loans on mortgage security in the total amount of $640,272.92, of which $354,590 or approximately 55.36 per cent represented loans made to members or stockholders and $285,782.92, or approximately 44.64 per cent represented loans made to nonmembers or nonstockholders. During the year it also made loans to members on stock, certificate, or pass-book security in the amount of $21,353. On December 31, 1919, there were outstanding loans in the amount of $1,743,831.55, but it is not shown what proportion of this amount represents loans made to members.
During the year 1920, the petitioner made loans on mortgage*3578 security in the amount of $490,293.47, of which amount $348,932, or *295 approximately 71.16 per cent, represented loans made to members or stockholders and $141,361.47, or approximately 28.84 per cent represented loans made to nonmembers or nonstockholders. Petitioner also made loans to members on stock, or pass-book security in the amount of $32,630.84. On December 31, 1920, there were outstanding loans in the amount of $1,827,141.77, of which amount $414,682.64, or approximately 22.69 per cent, represented loans made to members or stockholders and $1,412,459.13, or approximately 77.31 per cent, represented loans made to nonmembers or nonstockholders.
During the year 1921, the petitioner made loans on mortgage security in the amount of $130,765.71, of which $92,260, or approximately 70.55 per cent, represented loans to members or stockholders and $38,505.71, or approximately 29.45 per cent, represented loans made to nonmembers or nonstockholders. Petitioner also made loans to members on stock or pass-book security in the amount of $17,824. The outstanding loans as of December 31, 1921, were in the amount of $1,797,247.94, of which $404,707.93, or approximately 22.52*3579 per cent, represented loans made to members or stockholders, and $1,392,540.01, or approximately 77.48 per cent, represented loans made to nonmembers or nonstockholders.
The stipulation entered into between the parties shows that during the year 1922, the petitioner made loans on mortgage security in the amount of $386,506.21, of which $384,067.20 represented loans to members and $3,439.01 represented loans to nonmembers. There is clearly an error in this statement, and assuming that the loans to nonmembers amounted to $2,439.01, we find that approximately 99.37 per cent of the loans was to members or stockholders, and about .63 of 1 per cent was to nonmembers or nonstockholders. The petitioner also made loans to members on stock or pass-book security in the amount of $22,148.40. The total loans outstanding on December 31, 1922, amounted to $1,873,833.96, of which $712,646.59, or approximately 37.92 per cent represented loans made to members or stockholders and $1,161,187.37, or approximately 62.08 per cent, represented loans to nonmembers or nonstockholders. Approximately 69 per cent of the income of the petitioner during the year was derived from loans to nonmembers or nonstockholders.
*3580 During the year 1923, all the loans made by petitioner were to members or stockholders. The amount of $21,880.33 was loaned to members on stock or pass-book security. The total loans outstanding as of December 31, 1923, amounted to $2,196,486.32, of which $1,323,995.53, or approximately 60.28 per cent, represented loans to members or stockholders, and $872,490.79, or approximately 39.72 per cent, represented loans to nonmembers or nonstockholders. During *296 the year approximately 50 per cent of the income of the petitioner was derived from loans to nonmembers or nonstockholders.
There were received, among other receipts, by the petitioner the following amounts from the sources and during the years indicated:
| Year | Deposits | Borrowed money | Deposits from other building |
| and loan associations | |||
| 1918 | $571,848.73 | $10,000.00 | $10,000.00 |
| 1919 | 920,196.43 | ||
| 1920 | 936,904.23 | 39,000.00 | |
| 1921 | 648,626.05 | 15,000.00 | 5,000.00 |
| 1922 | 570,582.77 | 16,000.00 | 10,000.00 |
| 1923 | 624,112.83 | 70,000.00 | 10,000.00 |
No evidence was submitted to show whether these recerpts were from members or from nonmembers of the petitioner.
The Revenue Act of 1916, *3581 which was in effect until February 24, 1919, the date of passage of the Revenue Act of 1918, provided:
SEC. 11(a) That there shall not be taxed under this title any income received by any -
* * *
Fourth. Domestic building and loan association and cooperative banks without capital stock organized and operated for mutual purposes and without profit.
The Revenue Act of 1918 contains language almost identical with the above.
The Revenue Act of 1921 provides:
SEC. 231. That the following organizations shall be exempt from taxation under this title -
* * *
(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.
In Johnstown Building & Loan Association,6 B.T.A. 463">6 B.T.A. 463, we stated:
It thus appears that all the authorities agree that the distinguishing features 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*3582 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.
*297 In Broadview Savings & Loan Co., 10 B.T.A., 725, we said:
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 rights 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. *3583 Lilly Building & Loan Company v. Miller,280 Fed. 143.
* * *
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 federal income tax.
As pointed out in the cited cases, in order to be entitled to exemption from taxation the association must have operated upon a mutual basis. Just how far an association might go in making loans to and receiving deposits from nonmembers without losing its exemption it is difficult to determine.
We are of the opinion that during the years 1918, 1919, and 1920, the petitioner lacked the mutuality which is a requisite of a building and loan association and exemption is denied for those years.
With regard to the years 1921, 1922, and 1923, which are governed by the Revenue Act of 1921, we must determine whether the transactions of the petitioner for those years comes within the meaning of section 231(4) of that Act, which requires that "substantially all of the business * * * is confined to*3584 making loans to members" to be exempt.
During 1921, about 70.55 per cent of the loans made by the petitioner were to members or stockholders, and about 29.45 per cent were to nonmembers or nonstockholders. The source of the deposits and the borrowed money is not shown. We are of the opinion that during the year 1921, substantially all of the business of the petitioner was not confined to making loans to members and that the petitioner lacked the mutuality required for exemption from taxation.
During the year 1922, only about 0.63 of 1 per cent of the loans made by the petitioner were to nonmembers and during 1923, no loans were made to nonmembers. As pointed out hereinbefore, the petitioner, during the year 1922, received deposits in the amount of $570,582.77, borrowed money in the amount of $16,000, and received deposits from other building and loan associations in the amount of $10,000, and during the year 1923, received deposits in the amount *298 of $624,112.83, borrowed money in the amount of $70,000 and received deposits from other building and loan associations in the amount of $10,000.
In *3585 Broadview Savings & Loan Co., supra, in denying exemption to the petitioner we stated:
The respondent denied the petitioner's claim for exemption, and determined the deficiency involved herein. The burden is, therefore, upon the petitioner to show that it comes within the classification of the exemption provided in the statute. As stated by the court in Hubbard-Ragsdale Co. v. Dean, 15 Fed.(2d) 410 -
"The plaintiff claims the benefit of an exception to the general method and extent of taxing corporations. The burden is upon the plaintiff to show that it clearly comes within the terms of such exception."
In order to discharge the burden which it had assumed, the petitioner must establish (1) that, during the calendar year 1922, it was a domestic building and loan association within the meaning of the statute, and (2) that during said year substantially all of its business was confined to making loans to members.
* * *
As stated in the Lilley Building & Loan Co., supra, mutuality of interest between the stockholders on the one hand, and the depositors and borrowers on the other was lacking. Accordingly, the determination of the*3586 respondent is approved.
From the constitution and by-laws of the petitioner we conclude that the petitioner was authorized to receive deposits from nonmembers, but no evidence was submitted to show whether the deposits in either of the years 1922 or 1923, or the money borrowed in those years were received from members or from nonmembers. We must, therefore, hold that the petitioner has not shown that it possessed, during those years, the mutuality which is an essential attribute of a building and loan association, or that substantially all its business was confined to making loans to members.
Reviewed by the Board.
Judgment will be entered for the respondent.