*2988 Petitioner held entitled to exemption under section 231(4) of the Revenue Act of 1924.
*1079 The respondent determined a deficiency in income tax for the year 1924 in the amount of $538.23, which petitioner contests, claiming exemption under section 231(4) of the Revenue Act of 1924.
FINDINGS OF FACT.
Petitioner was incorporated in January, 1921, under section 9643 of Code of theState of Ohio, as a building and loan company, and commenced business in December of that year at South Euclid, Ohio, where it maintained its place of business in the taxable year.
Petitioner's articles of incorporation state that it is formed for the purpose of "raising money to be loaned to its members and others and generally the doing of all things and the transaction of all business authorized by the laws of Ohio to be done and transacted by savings and loan associations," and provide for capital stock in the amount of $500,000, divided into shares of a par value of $100 *1080 each. Petitioner's constitution contains a*2989 statement of its purpose in the same words as those in the articles of incorporation.
MEMBERSHIP.
Any person or firm upon subscribing for or in any manner becoming entitled to or the owner of any part of the capital stock of this Company shall be deemed a member thereof and a stockholder therein and shall be entitled to all the benefits and privileges and subject to all the liabilities and duties of stockholders as may be prescribed by the Constitution and By-Laws of this company and the laws of the State of Ohio.
Article VII provides:
The funds of the company shall be loaned subject to the Constitution and By-Laws and the laws of the State of Ohio upon mortgages on real estate or upon the stock or pass books of this company or other authorized security, but no loan shall be made until it has been approved by a majority vote at a legally held meeting of the Board of Directors of Executive Committee.
The constitution has never been amended.
Petitioner's by-laws provide for the issuance of installment stock and paid-up stock, the former being stock sold on the installment plan with payments not less than 50 cents per month on*2990 each $100, and the latter stock paid for in full at the time of subscription. The by-laws also provided for the receiving of deposits in amounts from $1 to $5,000 and the payment of interest thereon at the rate of 5 per cent per annum. As to loans, the by-laws provide (section 27) that:
The funds of the Company shall be loaned to its stockholders and others on such terms and at such rates of interest as shall be fixed by the Board of Directors.
and (section 28) that:
All loans made by this Company shall be secured by pledge of deposit, pass book, stock pass book, or certificate of stock of this Company, on which there has been paid in a sum of not less than 10% more than the amount loaned, which shall be known as "Temporary Loans;" or by first mortgage on real estate, which shall be known as "Mortgage loans." * * *
The by-laws were amended in 1924 in certain particulars not important here.
Petitioner operated under the supervision of the State Superintendent of Building and Loan Associations, its records were periodically audited by representatives of the superintendent, and it filed with the superintendent an annual report as required by sections 682 and 683 of the Ohio*2991 Code. Its annual report for the year 1924 gave the following statistics:
| Disbursements. | Amount. |
| Loans on mortgage security | $291,505.74 |
| Loans on stock, certificate, or passbook security | 11,821.59 |
| Unfinished building accounts | 291,372.86 |
| Withdrawals of running stock and dividends | 57,746.70 |
| Withdrawals of paid-up stock | 5,000.00 |
| Withdrawals of deposits | 500,919.50 |
| Borrowed money | 35,000.00 |
| Real estate (purchase price) | 10,500.00 |
| Dividends on paid-on stock | 5,584.16 |
| Dividends on running stock | 9,768.96 |
| Interest on deposits | 10,213.49 |
| Interest on borrowed money | 2,914.99 |
| Salaries of officers and directors | 5,046.92 |
| Office help, rent, and legal services | 4,547.50 |
| All other expenses | 3,284.12 |
| Taxes | 109.04 |
| Mortgage credits transferred to repay loans | 140,436.18 |
| Purchase of furniture and fixtures | 53.00 |
| Escrow deposits | 33,589.33 |
| Abstract deposits | 130.00 |
| Total | 1,419,543.99 |
| Cash on hand | 17,775.22 |
| 1,437,219.21 | |
| Receipts. | Amount. |
| Dues on running stock | $87,574.76 |
| Paid-up stock | 41,800.00 |
| Certificates of deposit | 38,582.00 |
| Deposits | 575,006.36 |
| Credits on mortgage loans | 141,859.76 |
| Loans on mortgage security repaid | 104,084.79 |
| Loans on stock, certificates, or pass-book security repaid | 6,257.00 |
| Unfinished building account | 306,587.78 |
| Borrowed money | 35,000.00 |
| Interest | 36,839.47 |
| Premium on loans | 10,840.78 |
| Escrow fees | 405.00 |
| Premium on stock (to reserve fund) | 40.00 |
| Escrow deposits | 33,702.25 |
| Abstract deposits | 150.00 |
| Total | 1,418,729.95 |
| Cash on hand at close of fiscal year | 18,589.26 |
| 1,437,319.21 |
| PROFIT AND LOSS. | |||
| EARNINGS. | DISTRIBUTION. | ||
| Interest | $36,839.47 | Dividends on running stock | $9,768.96 |
| Premium on loans | 10,840.78 | Dividends on paid-up stock | 5,584.16 |
| Escrow fees | 405.00 | Reserve fund | 1,755.00 |
| Undivided profits | 4,708.07 | ||
| Interest on deposits | 10,213.49 | ||
| Interest on borrowed money | 2,914.99 | ||
| Salaries of officers and directors | 5,046.92 | ||
| Office help, rent, legal services | 4,547.50 | ||
| All other expenses | 3,284.12 | ||
| Taxes | 109.04 | ||
| Furniture and fixtures depreciation | 153.00 | ||
| Total | 48,085.25 | Total | 48,058.25 |
*1081 Petitioner's undivided profit fund for 1924 was as follows:
| January 1, 1924 | $9,493.53 |
| Amount added during year | 4,708.07 |
| December 31, 1924 | 14,201.60 |
At January 1, 1924, there were outstanding 122 mortgage loans that had been made in previous years, classified as follows:
| Loans. | Original amount. | |
| For construction and refinancing of homes | 115 | $380,600 |
| To buy land | 5 | 30,800 |
| For mercantile or apartment buildings | 2 | 27,000 |
| Total | 438,400 |
All of the above loans were made to members. There was outstanding on them at January 1, 1924, the*2993 amount of $419,963.01.
*1082 During the year 1924 petitioner made the following mortgage loans to members on running stock:
| Classification. | Number. | Amount. |
| Homes for sale | 20 | $70,450.00 |
| Homes for borrower's occupancy | 50 | 192,555.74 |
| To buy land | 1 | 1,500.00 |
| Mercantile or apartment buildings | 2 | 27,000.00 |
| Total | 291,505.74 |
The unpaid balance on mortgage loans, all of which had been made to members, amounted to $607,383.96 at December 31, 1924.
Temporary or collateral loans made on paid-up stock or running stock accounts at January 1, 1924, were three in number, amounting to $2,600. A number of such loans, aggregating $11,821.50, were made during the year, and at the close of the year 13 were outstanding with an unpaid balance of $8,164.50.
Petitioner accepted savings deposits and the amount of such deposits and number of depositors were as follows:
| Number | Amount | |
| At January 1, 1924 | 1,450 | $160,064.67 |
| At December 1, 1924 | 1,641 | 272,733.53 |
The nonstockholder depositors at the close of 1924 numbered 1,433 with $162,842.69 to their credit. Stockholders' deposits, amounting to $109,890.84, were classified as follows: *2994
| Running stock-savings account | $61,770.54 |
| Running stock-certificates of deposit | 23,832.00 |
| Paid-up stock | 24,288.30 |
| Total | 109,890.84 |
Petitioner, by advertising and the distribution of small home banks, solicited savings accounts. It carried no checking accounts. Interest and dividends were paid in the following percentages:
| Savings accounts | 5 per cent interest |
| Certificates of deposit | 6 per cent interest |
| Stock | 7 per cent dividends |
Dividends were paid at an equal rate to all stockholders.
Borrowers were charged 7 per cent interest, plus 4 per cent service charge, the latter being charged to cover supervision of the construction of buildings. Funds for making loans are obtained from the sale of stock, repayment of loans, and savings deposits. Prior to the taxable year petitioner had borrowed $55,000 from two *1083 trust companies for the purpose of making mortgage loans. This amount was outstanding during the entire year and for the use of it petitioner paid 6 per cent interest.
Petitioner made loans for purposes other than home building only when it had a surplus of funds and no applications for loans on homes. In some cases*2995 buildings constructed by borrowers were sold to nonmembers before the loan was repaid, but in such cases the borrowers were required to keep their stock until the loan was paid.
During the year petitioner purchased a parcel of real estate for an office site for itself. This property was subsequently sold at a profit. Petitioner sold no real estate or mortgages in the taxable year.
OPINION.
ARUNDELL: Exemption from tax is claimed by petitioner under section 231(4) of the Revenue Act of 1924 which grants exemption to:
Domestic building and loan associations substantially all the business of which is confined to making loans to members; * * *
There can be no doubt that petitioner comes within the classification of "domestic building and loan associations," as it was incorporated as such under the laws of the State of Ohio and operated as such during the taxable year.
Upon the evidence we think it clear that petitioner meets the remaining qualification, that is, that substantially all of its business was confined to making loans to members. Membership was acquired by stock ownership and the evidence is that loans were made only to stockholders. While it is not brought*2996 out what amount of stock a borrower was required to hold, it is settled by the decision in
In that case, as in this, the company received a large proportion of deposits from persons who were not members and it paid interest on such deposits. As to this feature the Supreme Court said: "But for such an association to start it must have some money to lend, and the typical member does not have it."
We have here much clearer facts in favor of the exemption claimed than were present in the Cambridge case. In that case, at least *1084 during the early years involved, large loans were made to nonmembers, while here, as has been pointed out, loans were confined to members.
Reviewed by the Board.
Judgment of*2997 no deficiency will be entered.