Court Opinion

ID: 4592107
Source: CourtListenerOpinion
Date Created: 2020-11-20 19:07:14.15339+00
Date Added: 2024-06-11T07:50:48.572667
License: Public Domain

WYTHEVILLE BUILDING & LAND FUND ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Wytheville Bldg. & Land Fund Asso. v. CommissionerDocket No. 82775.United States Board of Tax Appeals36 B.T.A. 786; 1937 BTA LEXIS 655; November 2, 1937, Promulgated 1937 BTA LEXIS 655">*655  A corporation lending money on real estate, whose profits are divided among the holders of its 250 outstanding shares to none of whom it makes loans, is not an exempt building and loan association within Revenue Act of 1932, section 103, merely because as an incident to each application for a loan to others it requires a form of bond to be signed which recites a subscription for shares, their assignment to the association, and their immediate redemption, the applicant having no interest in the business or profits of the corporation.  Walter E. Barton, Esq., for the petitioner.  Francis L. Van Haaften, Esq., for the respondent.  STERNHAGEN 36 B.T.A. 786">*786  The Commissioner determined a deficiency of $136.80 in petitioner's income tax for 1933.  Petitioner contends that it is exempt from tax as a domestic building and loan association under section 103(4), Revenue Act of 1932.  FINDINGS OF FACT.  Petitioner, a Virginia corporation with principal office at Wytheville, Virginia, was organized on February 12, 1887, under a charter which states: The chief business of the said corporation shall be to provide funds for the purpose of enabling its members to1937 BTA LEXIS 655">*656  purchase lots and houses, erect buildings, improve lands, to remove incumbrances from real estate and to distribute among the incorporators who do not receive advance [sic] their proper shares of the accumulations.  * * * The said corporation shall have authority to invest any of its surplus funds, over and above what is lent or advanced to its members, in the purchase of real estate for the purpose of selling the same at a profit, or to lend the said surplus funds to others than its members upon real estate security.  36 B.T.A. 786">*787  Capital stock of between $20,000 and $100,000, divided into shares of a par value of $100, was originally authorized, but later reduced to a minimum of $10,000 and maximum of $30,000.  During 1933, the paid-up capital stock amounted to $25,000, represented by 250 shares.  Petitioner made no loans to holders of these shares, but customarily dealt with others.  Upon application for a loan, the applicant received $99 for each $100 applied for, and at the same time signed a bond in petitioner's favor in a sum equal to the par value of the shares said to be subscribed for plus 6 percent annual interest for 100 months on the amount thereof.  This1937 BTA LEXIS 655">*657  bond was conditioned upon the applicant's meeting his recited obligation to pay a specified monthly amount as interest and to make a specified monthly payment on the amount "advanced to him by said Association for the redemption of five shares of the stock thereof * * *", these payments being described as "monthly dues on said shares." By the same instrument the applicant assigned to petitioner the shares for which he was said to have subscribed, "this day redeemed at $99 per share." In practice, no certificates for such shares were ever issued.  As additional security for the moneys advanced, the applicant was also required to deed real estate in trust to petitioner, and to pay the legal and recording fees connected therewith.  Petitioner operated under no written bylaws in 1933.  Bylaws were formally adopted in 1935, whereby borrowers were thereafter to "share in dividends in excess of 6%." The 250 shares of paid up and authorized stock were held by approximately 35 individuals, none of whom borrowed from petitioner in 1933.  These shareholders alone receive dividends on their stock, which are paid from petitioner's profits.  Petitioner accepts no deposits.  In the annual published1937 BTA LEXIS 655">*658  reports of the Virginia State Corporation Commission it is listed among "Building and Loan Associations." In its financial statements practically all of its resources are described as "Mortgage Loans", its only outstanding shares are shown as "Full Paid Shares $25,000", and the items called "Prepaid Stock", "Matured Stock", and "Installment Stock" are blank.  OPINION.  STERNHAGEN: The Commissioner having determined that petitioner was not exempt from tax, it petitions on the ground that it is, within section 103 of the Revenue Act of 1932, a "(4) Domestic building and loan association substantially all the business of which is confined to making loans to members." It is not necessary to consider whether the petitioner may properly bear the statutory label of domestic building and loan association.  If, like the 1918 Act, the statute controlling the present case 36 B.T.A. 786">*788  carried no further qualification, it might be necessary because of the recognition of it by the Virginia Corporation Commission as a building and loan association to treat it as within this category of the revenue act.  1937 BTA LEXIS 655">*659 . But the revenue acts since 1921 have carried a limitation which narrowed the category to those "substantially all the business of which is confined to making loans to members", and the limitation was primarily designed to exclude mortgage and investment companies operating in the guise of building and loan associations. . The petitioner claims to be within the narrower definition because the method of its operation is to make every borrower a member.  Colloquially it speaks of the owners of its 250 outstanding shares as its "permanent" members and those who sign the prescribed form as an incident to a loan as its "installment" members.  None of the former are among those to whom loans are made, and none of the latter are in any way interested in the earnings or have a voice in the corporation's affairs.  The so-called shares for which a borrower is treated as subscribing are simultaneously assigned and redeemed.  They are never issued and never are outstanding.  No matter how successful the corporation may be, the borrower's obligation1937 BTA LEXIS 655">*660  as to loan and interest remains fixed throughout the term, and there is no offsetting benefit from the company's prosperity.  See . We think they were not members; and, since all the petitioner's business was making loans to them, it can not be found as a fact that substantially all its business was confined to making loans to members.  Without such a finding there is no exemption from tax.  Liberally as the exemption should be applied, ;; ; ; , its limits are not to be overridden by an artificial ritual which is without substance.  There must be some evidence of cooperative effort to reduce burdens and share benefits, and nothing of this sort appears in this petitioner's business.  It seems to be a straight lending business, of which the profits are distributed1937 BTA LEXIS 655">*661  to its 35 shareholders.  See Law of Federal Income Taxation, Paul and Mertens, vol. 3, sec. 32.06.  Judgment will be entered for the respondent.