#### CALVERT MORTGAGE CO. v. THE UNITED STATES

[No. D-1016.

Decided November 7, 1927]

*On the Proofs*

*Income tax; 6ivilding and loam, dissociations; exemption; reverme act of 1918.*— See *Cambridge Looai & Buildvmg Co.*v. *United States,*63 C. Ols. 631.

*The Reporter’s*statement of the case:

*Mr. A. F.*Prescott, jr., for the plaintiff. *Lyon <& Lyon*were on the brief.

*Mr. Alexander H.*McCormick, with whom was *Mr. Assistant Attorney General Hermann J.*Galloway, for the defendant.

The court made special findings of fact, as follows:

I. The plaintiff, the Calvert Mortgage Co., was incorporated on the 23d day of February, A. D. 1895, under the authority of article 23 (titled “ Building and Loan Associations .”) of the Code of Law (1888-1904) of the State of Maryland, which provides for the operation and conduct of corporations or associations organized for the purpose of conducting the business of a building and loan association, and said corporation has continuously since its organization existed and operated, and is now existing and operating under the aforesaid law, with its principal office in the city of Baltimore, State of Maryland.

*262II. The charter and by-laws under which the plaintiff operated from January 1, 1918, to December 31, 1920, are attached to plaintiff’s petition as Exhibit A and made a part of this finding by reference.

III. Plaintiff during the period January 1, 1918, to December 81, 1920, derived the funds used and employed by it in its business—

First, from the sale by it for cash at $100 per share of full paid-up capital stock of two classes which were evidenced by certificates known as 5 and 6 per cent certificates, respectively.

Second, from the sale by it of installment stock of the following classes:

Class A, requiring monthly payments at 50 cents per share per month.

Class W, maturing in 60 months, requiring monthly payment of $1.65 per share.

Class T, maturing in 12 months, requiring monthly payment of $1.35 per share.

Class S, maturing in 84 months, requiring monthly payment of $1.15 per share.

Class E, maturing in 96 months, requiring monthly payment of $1 per share.

Third, from moneys borrowed by plaintiff from banks and other financial institutions on its own promissory notes running from 30 to 90 days, and plaintiff in said years 1918, 1919, and 1920 borrowed on such notes, including renewals, the following amounts:

1918_$229, 000. 00

1919_ 525, 000. 00

1920 _ 90, 000. 00

The greatest amounts owed at any one time during said years on said notes were as follows:

1918_$120, 500. 00

1919_ 807,500.00

1920_f_ 202,500.00

IY. Plaintiff’s assets and liabilties for the years 1918, 1919, and 1920 are shown in the following statements:

*263December 31, 1918

Assets:

Cash_,_ $59, 908. 72

Mortgage loans_ 1, 887, 411.41

Stock loans_ 200. 00

Liberty loan bonds, etc_ 140, 500.00

Interest accrued on mortgage loans 23, 208.12

Taxes advanced for borrowers_ 1,238. 86

Furniture and fixtures_ 2, 521.20

Beal estate_ 5, 767. 52

Deferred charges_ 812.27

$2,121, 568.10

Liabilties:

Payments on account of mortgage loans_ 594,945.03

Notes payable _ 108, 000. 00

Dividends payable_1_ 42, 466.73

Sundry accounts- 240. 73

Beserve for depreciation_ 252.12

Beserve for taxes_ 1, 308. 00

747,212.61

Capital:

Paid-up capital stock, 6 per cent_ 1, 046, 025. 00

Paid-up capital stock, 5 per cent— 215, 653.55

Installment stock_ 73, 867.37

Total 1,335, 545.92

Surplus 38, 809. 57

2,121, 568.10

December 31, 1919

Assets:

Cash_ $75, 052. 08

Mortgage loans_ 2, 269, 742.00

Stock loans_ 10. 00

Liberty loan bonds, etc- 140, 650.00

Interest accrued on mortgage loans— 22, 983. 90

Taxes advanced for borrowers- » 1,170. 22

Furniture and fixtures- 2, 908. 86

Beal estate- 1, 545. 25

Deferred charges-

2, 514,062. 31

Liabilities:

Payments on account of mortgage loans_ 606, 400. 74

Notes payable_ 202, 500.00

Dividends payable- 48, 573. 68

Sundry accounts-¿- 3, 729.49

Beserve for depreciation-- 541. 92

Beserve for taxes- 12, 054.02

873, 799.85

*264Capital:

Paid-up capital stock, 6 per cent_$1,306, 040. 00

Paid-up capital stock, 5 per cent_ 223, 533. 55

Installment stock_ 67, 861.39

Total-,_$1,596,434.94

Surplus- 43, 827. 52

2,514, 062. 31

DECEMBER 31, 1920

Assets:

Cash_ $94, 869. 58

Mortgage loans- 2,454,700.25

Liberty loan bonds, etc_ 40, 000.00

Interest accrued on mortgage loans— 25,114. 86

Taxes advanced for borrowers_ 1, 919. 35

Furniture and fixtures_ 3,198. 36

Real estate_ 571.72

2, 620, 374.12

Liabilities:

Payments on account of mortgage loans- 661, 366. 34

Notes payable_ 15, 000. 00

Dividends payable_ 52, 040. 86

Sundry accounts_ 1, 373. 54

Reserve for depreciation_ '861. 76

Reserve for taxes_!_ 22, 975. 32

753,617. 84

Capital:

Paid-up capital stock, 6 per cent_ 1, 548,340.00

Paid-up capital stock, 5 per cent_ 222, 946. 55

Installment stock_ 56,197. 94

1, 827,484. 49 Total.

39, 271.79 Surplus

2, 620, 374.12

V. Plaintiff’s funds were loaned on real-estate security, both principal and interest being repayable in monthly installments, the interest payments reducing as the principal was reduced by said payments.

VI. Plaintiff did not confine its business to the State of Maryland, but in excess of 95 per cent of its funds were loaned to nonmembers in the States of Florida, Mississippi, Georgia, and Oklahoma, the rates of inteiest realized by plaintiff on loans made in these States being the legal rates provided by the laws of said respective States, varying from 8 to 10 per cent per annum.

*265VII. During the period from January 1, 1918, to December 31, 1920, plaintiff’s loans to members were made to holders of classes, K, S, T, and W stock and none were made to member's holding prepaid stock, or class A installment stock, and during the respective years were as follows:

During 1918 six member loans were made by plaintiff in the total sum of $18,560, of which three loans, totaling $850, were made in the State of Georgia at 8 per cent interest, and three loans, totaling $17,800, were made in the city of Baltimore, Md., at 6 per cent interest. During said yeai plaintiff declared and credited to said installment stock dividends at the rate of 6 per cent per annum.

During the year 1919 plaintiff made five member loans, totaling $11,500, all of which loans were made in the city of Baltimore, Md., at 6 per cent interest, and plaintiff declared and credited dividends on the installment stock at 6 per cent per annum.

During the year 1920 plaintiff made 11 member loans, all in the city of Baltimore, Md., totaling $33,900, at 6 per cent interest, and during said year declared and credited dividends on its installment stock at 6 per cent per annum.

VIII. During the period from January 1, 1918, to December 31, 1920, in excess of 95 per cent of plaintiff’s loans were made to nonmembers as follows:

During 1918 plaintiff made to 421 nonmembers 421 loans amounting to the sum of $676,994.94.

During the year 1919 plaintiff made to 467 nonmembers 467 loans amounting to the sum of $842,961.00.

During the year 1920 plaintiff made to 314 nonmembers 314 loans amounting to the sum of $660,082.25.

Borrowing nonmembers were not required by plaintiff to subscribe for or purchase stock of any class in order to obtain loans, nor did said nonmember borrowers share in any way in plaintiff’s earnings.

IX. Plaintiff’s loans to its borrowers were made either for the purpose of building homes, improving homes, purchasing homes, or for paying off existing loans on homes, but in some cases loans were made on stores or apartment houses, and during the year 1918 plaintiff from its surplus funds loaned $70,000 to the Maryland Title Co., upon mortgage *266security deposited as collateral by said Maryland Title Co. with said plaintiff.

X. Plaintiff during the period from. January 1, 1918, to December 31, 1920, accepted no money for deposit, nor did it buy or sell personal property or securities such as stocks, bonds (other than Anglo-French and Liberty loan bonds), bills of exchange, or commercial paper either for discount or sale.

XI. Plaintiff was by the Commissioner of Internal Bev-enue required to file, and did file under written protest, income-tax returns for the years 1918, 1919, and 1920 under the provisions of section 230 of the revenue act of 1918. Said income-tax returns disclosed net income as follows: •

*Original returns*

Tear 1918_ $9, 010.26

Tear 1919_ 16, 088. 61

Tear 1920_ 7, 481.49

*Amended, returns*

Year 1918_ 80,225.18

Tear 1919_ 94, 963. 00

Year 1920_ 101, 795. 34

XII. Upon the filing of said above-mentioned original and amended income-tax returns for the years 1918, 1919, and 1920 the collector of internal revenue at Baltimore, Md., acting for and on behalf of the United States, required said plaintiff to pay to the United States as and for income taxes sums which were turned into the United States Treasury as follows:

*On said original returns*

Year 1918_ $841.23

Year 1919_ 2,192.16

Year 1920_ 548.15

*On said amended returns*

Year 1918_ 8,545.79

Year 1919_ 7,104.14

Year 1920__ 9,431.38

Total tax paid_ 28, 662. 85

Said sums so paid by plaintiff were paid under written protest.

*267XIII. On November 11,1922, plaintiff duly filed claim for refund with, the Commissioner of Internal Revenue of said taxes theretofore paid by it in the sum of $28,662.85. Said claim for refund was duly rejected by the Commissioner of Internal Revenue on November 22, 1924, in said sum of $28,662.85, no part of which has been repaid to said plaintiff.

The court decided that plaintiff was entitled to recover the sum of $8,581.54, with interest thereon at the rate of 6 per cent per annum from June 10, 1922, until date of judgment, and the sum of $25,081.31, with interest thereon at the rate of 6 per cent per annum from August 7, 1922, until date of judgment, an aggregate of $37,725.67.

MEMORANDUM BY THE COURT

The question for determination in this case is whether or not plaintiff, the Calvert Mortgage Company, is entitled to exemption from the payment of income taxes for the years 1918, 1919, and 1920, under the provisions of section 231 (4) of the revenue act of 1918 (40 Stat. 1075-1080), which reads as follows:

> “ Sec. 231. That the following organizations shall be exempt from taxation under this title:

> “ (4) Domestic build,ing and loan associations and cooperative banks without capital stock organized and operated for mutual purposes and without profit.”

This case is controlled by the case of the *Cambridge Loan & Building Company*v. *United*States, 63 C. Cls. 631, and reference is hereby made to the opinion of the court in that action.