Court Opinion

ID: 4606705
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:39:08.11384+00
Date Added: 2024-06-11T07:53:25.646933
License: Public Domain

SOUTH EUCLID SAVINGS & LOAN CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.South Euclid Sav. & Loan Co. v. CommissionerDocket No. 19508.United States Board of Tax Appeals14 B.T.A. 1079; 1929 BTA LEXIS 2988; January 9, 1929, Promulgated *2988  Petitioner held entitled to exemption under section 231(4) of the Revenue Act of 1924.  W. E. Lewis, C.P.A., and Percy D. Caldwell, Esq., for the petitioner.  Byron M. Coon, Esq., for the respondent.  ARUNDELL*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.  Article III of the constitution provides: 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$291,505.74Loans on stock, certificate, or passbook security11,821.59Unfinished building accounts291,372.86Withdrawals of running stock and dividends57,746.70Withdrawals of paid-up stock5,000.00Withdrawals of deposits500,919.50Borrowed money35,000.00Real estate (purchase price)10,500.00Dividends on paid-on stock5,584.16Dividends on running stock9,768.96Interest on deposits10,213.49Interest on borrowed money2,914.99Salaries of officers and directors5,046.92Office help, rent, and legal services4,547.50All other expenses3,284.12Taxes109.04Mortgage credits transferred to repay loans140,436.18Purchase of furniture and fixtures53.00Escrow deposits33,589.33Abstract deposits130.00Total1,419,543.99Cash on hand17,775.221,437,219.21Receipts.Amount.Dues on running stock$87,574.76Paid-up stock41,800.00Certificates of deposit38,582.00Deposits575,006.36Credits on mortgage loans141,859.76Loans on mortgage security repaid104,084.79Loans on stock, certificates, or pass-book security repaid6,257.00Unfinished building account306,587.78Borrowed money35,000.00Interest36,839.47Premium on loans10,840.78Escrow fees405.00Premium on stock (to reserve fund)40.00Escrow deposits33,702.25Abstract deposits150.00Total1,418,729.95Cash on hand at close of fiscal year18,589.261,437,319.21*2992 PROFIT AND LOSS.EARNINGS.DISTRIBUTION.Interest$36,839.47Dividends on running stock$9,768.96Premium on loans10,840.78Dividends on paid-up stock5,584.16Escrow fees405.00Reserve fund1,755.00Undivided profits4,708.07Interest on deposits10,213.49Interest on borrowed money2,914.99Salaries of officers and directors5,046.92Office help, rent, legal services4,547.50All other expenses3,284.12Taxes109.04Furniture and fixtures depreciation153.00Total48,085.25Total48,058.25*1081  Petitioner's undivided profit fund for 1924 was as follows: January 1, 1924$9,493.53Amount added during year4,708.07December 31, 192414,201.60At 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 homes115$380,600To buy land530,800For mercantile or apartment buildings227,000Total438,400All 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 sale20$70,450.00Homes for borrower's occupancy50192,555.74To buy land11,500.00Mercantile or apartment buildings227,000.00Total291,505.74The 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: NumberAmountAt January 1, 19241,450$160,064.67At December 1, 19241,641272,733.53The 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$61,770.54Running stock-certificates of deposit23,832.00Paid-up stock24,288.30Total109,890.84Petitioner, 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 accounts5 per cent interestCertificates of deposit6 per cent interestStock7 per cent dividendsDividends 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 United States v. Cambridge Loan & Building Co.,278 U.S. 55">278 U.S. 55; 1928 C.C.H., p. 8861, that a building and loan association does not lose its exempt status by granting loans to members in excess of their stockholdings.  In that case it appears stockholders were required to subscribe for only "from one to five shares regardless of the amount of the loan," and the court says: "The statute did not limit loans to the amount of stock subscribed for." 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.