Richland County Bldg. & Loan Asso. v. Commissioner , 15 B.T.A. 537 ( 1929 )

RICHLAND COUNTY BUILDING & LOAN ASSOCIATION, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Richland County Bldg. & Loan Asso. v. Commissioner

Docket Nos. 19420, 21259, 38675.

United States Board of Tax Appeals

15 B.T.A. 537; 1929 BTA LEXIS 2833;

February 21, 1929, Promulgated

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Petitioner held to be a building and loan association.

W. E. Barton, Esq., and Raymond Cushman, Esq., for the petitioner.

J. A. Adams, Esq., for the respondent.

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PHILLIPS

The petitioner appealed from the determinations of the Commissioner of Internal Revenue of deficiencies of income taxes for the fiscal years ending March 31, 1921, to 1925, as follows:

Docket No.	Fiscal year	Deficiency
19420	1921	$208.65
19420	1922	274.06
19420	1923	458.62
38675	1924	$724.40
21259	1925	855.19

The deficiencies resulted from the refusal of the Commissioner to find that the petitioner was exempt from income taxation as a building and loan association under section 231(4) of the Revenue Acts of 1918, 1921, and 1924. Petitioner also claims that any deficiency for the fiscal year 1921 is barred by limitations.

FINDINGS OF FACT.

The petitioner is a corporation organized or April 1, 1919, under the laws of the State of North Dakota with principal place of business at Wahpeton, N. Dak. It was organized as a building and loan association under the provisions of chapters 12 and 26, Civil Code, Compiled Laws of North Dakota, 1913, and amendments thereto.

The articles of incorporation of the petitioner contain the following provisions:

Article 2. The purposes for which it is formed are: The loaning of money to its members for the erection of dwellings and other buildings, for the improvement of real estate or for other investments or purposes, and the taking of mortgages on real estate or pledges of stock of said corporation to secure such loans, and to do the general business of a building and loan association as prescribed by the laws of the State of North Dakota.

Also the borrowing of money for the purpose of reinvesting such money in such manner as the Board of Directors shall determine and deem advisable.

Also the purchase and sale of first and second real estate mortgages, bonds, commercial paper, and such other evidence of indebtedness as may be approved by the Board of Directors.

The by-laws of the petitioner, adopted April 11, 1919, contained the following provisions:

Article I, Section 1. Any person may become a stockholder of this association by taking at least two shares of stock, but no person shall be admitted to the privileges of the association unless a stockholder.

Article I, Section 2. Every stockholder shall pay fifty cents admission fee on subscribing, and a monthly installment of twenty five cents per share as dues, which dues shall be paid in advance on or before the tenth day of each month.

Article I, Section 4. The money paid by stockholders shall be applied to the payment of the oldest arrearages of dues, interest, premiums, fines or other charges due from such stockholders.

Article VII, Section 1. The funds of the association may be loaned to the members thereof in the order in which they apply for the same, on mortgages and stock of the association upon such terms and rates of interest as the Board of Directors may determine, subject to the restrictions hereinafter contained.

Article VII, Section 2. All loans except as hereinafter provided shall bear a rate of interest which shall be fixed by the Board of Directors and such interest shall be payable monthly during the continuance of the loan.

Article VII, Section 3. Whenever money shall accumulate in the treasury which cannot be loaned out satisfactorily on the monthly installment plan, the Board of Directors may loan the same to members on such terms as they deem best or may purchase first or second mortgages or commercial paper.

Article VII, Section 4. Each borrowing member shall pay to the association monthly not less than one dollar and twenty cents on each one hundred dollars of loan made to such member, which shall be applied as follows:

FIRST: To the payment of interest accruing on the loan contract.

SECOND: To the payment of any insurance premium, assessments or taxes paid by said association, according to these by-laws and the contract and mortgage securing any such loan.

THIRD: The balance of said payments shall be credited on the principal of said loan, and all accruing credits on said stock shall be assigned to said association as collateral security for said loan.

Said monthly payments shall continue until said loan and all other sums advanced in accordance with the terms of said contract and mortgage shall be paid with interest, as therein specified.

Article VII, Section 5. All loans must be secured by mortgage on real estate in North Dakota or on stock in this association in an amount not exceeding the withdrawal value of the stock so offered as security.

Article VII, Section 10. All assessments and payments of money to the association whether on loans, the purchase of stock, or otherwise, shall become due and payable on the first day of each and every month and shall become delinquent, and subject to the provisions of these by-laws relating to fines, on the tenth day of the month in which the assessment or payment shall have become due as herein provided.

Article X, Section 1. When the accumulation of profits and the payment of dues together equal the par value of the subscribed stock in any series, each stockholder shall receive fifty dollars per share in cash on surrender of his stock.

Article XI, Section 6. The highest amount of indebtedness or liability which the association shall at any time incur, shall not exceed the sum of One Hundred Thousand Dollars ($100,000.00).

On April 21, 1924, article VII, section 1, of the by-laws was amended to read as follows:

(a) STOCK LOANS, or loans on stock of the association, may be made to stockholders on such terms as the board of directors may direct, and the rate of interest to be charged on such loans shall be fixed by the board of directors from time to time. Stock loans shall be secured by a transfer of the stock to the association as collateral security and the amount of any such loan shall not exceed ninety per cent of the book value of the stock offered as security.

(b) REAL ESTATE LOANS, or loans which are made with a real estate mortgage taken as security and additionally secured by stock in the association, as hereinafter provided, may be made to the stockholders on such terms as the board of directors may direct, and the rate of interest to be charged on such loans shall be fixed by the board of directors from time to time, it being provided that any person or persons who make a Real Estate Loan thru the association must either own, or subscribe for and own, and pledge to the association as collateral security to such loan, at least four $50.00 shares of association stock for the first $1,000.00 of a loan made, and two $50.00 shares of association stock for each additional $1,000.00, or fractional part thereof, of a loan made, and it being further provided that any person or persons who make a real estate loan thru the association has the privilege of subscribing for and can demand, at the time the application for the loan is made, as much stock in the association as he, she, or they desire, up to the amount of the loan granted and made.

All the above subject to the restrictions and provisions hereinafter contained.

The petitioner issued only one class of stock, namely, running or installment stock. The stockholders paid for their stock at the rate of 25 cents per month on each share subscribed for, the par value of which $50was. The total authorized capital stock was $2,000,000.

The petitioner's receipts for each of the fiscal years ending on the dates indicated were as follows:

	Mar. 31, 1921	Mar. 31, 1922	Mar. 31, 1923	Mar. 31, 1924	Mar. 31, 1925
Cash on
hand at
beginning
of year	$345.73	$196.62	$2,491.66	$15.42	$257.06
Payments
on stock	5,463.50	5,466.00	5,532.00	5,547.00	5,754.50
Interest
collected	10,556.05	11,065.23	11,633.13	13,985.77	14,013.41
Loan
payments	18,559.14	26,858.73	12,348.00	25,417.66	48,702.90
Money
borrowed	104,650.00	58,075.00	45,450.00	62,719.04	17,550.00
Fines and
penalties	20.45	191.65	97.60	296.45	271.00
Accounts
receivable		422.00			88.51
Taxes
redeemed			108.39	322.72	594.10
Total	139,594.87	102,275.23	77,660.78	108,304.06	87,231.48

The petitioner's disbursements for each of the fiscal years ending on the dates indicated were as follows:

	Mar. 31, 1921	Mar. 31, 1922	Mar. 31, 1923	Mar. 31, 1924	Mar. 31, 1925
Stock
redeemed	$33.00	$24.60		$93.30	$317.90
Notes
paid	75,160.00	70,125.00	$33,400.00	65,959.52	30,850.00
Loans
made	58,700.00	22,050.00	36,600.00	34,350.00	50,700.00
Interest
paid	4,714.07	6,714.27	5,981.37	6,479.99	4,585.53
Expenses
paid	369.18	359.17	414.45	359.58	412.96
Taxes
advanced		510.53	408.06	446.96	339.89
Accounts
receivable	422.00		841.48	357.65
Cash on
hand	196.62	2,491.66	15.42	257.06	25.20
Total	139,594.87	102,275.23	77,660.78	108,304.06	87,231.48

The balance sheets of the petitioner as of the dates indicated were as follows:

	Mar. 31, 1920	Mar. 31, 1921	Mar. 31, 1922
ASSETS
Loans	$73,703.33	$113,844.19	$109,035.46
Books and Stationery	99.90	99.90	99.90
Cash	345.73	196.62	2,491.66
Accounts and notes receivable		422.00
Tax sale certificates			510.53
	74,148.96	114,562.71	112,137.55
LIABILITIES
Investment stock	5,335.50	12,544.00	22,093.32
Bills payable	66,010.00	95,500.00	83,450.00
Reserve for interest accrued	1,001.66	2,408.44	2,012.50
Undivided profits	1,801.80	4,110.27	4,581.73
	74,148.96	114.562.71	112,137.55

	Mar. 31, 1923	Mar. 31, 1924	Mar. 31, 1925
ASSETS
Loans	$133,287.46	$142,219.80	144,216.90
Books and Stationery	99.90	99.90	99.90
Cash	15.42	257.06	25.20
Accounts and notes receivable	841.48	1,199.13	1,110,62
Tax sale certificates	810.20	934.44	680.23
	135,054.46	144,710.33	146,132.85
LIABILITIES
Investment stock	32,197.86	43,323.12	56,545.20
Bills payable	95,500.00	92,259.52	78,959.52
Reserve for interest accrued	1,678.46	1,325.94	1,838.12
Undivided profits	5,678.14	7,801.75	8,790.01
	135,054.46	144,710.33	146,132.85

All of the money borrowed by the petitioner during the years involved in this appeal was for the purpose of making loans previously applied for. The average rate of interest paid by the petitioner on borrowed money was 6 1/2 per cent per annum.

The number and amount of loans made by the petitioner during the years 1920 to 1925, inclusive, together with the purposes for which such loans were made, were as follows:

Purpose	Number	Year	Number	Year	Number	Year	Number
	of loans	1920	of loans	1921	of loans	1922	of loans
Building used as
borrower's home	25	$53,000	20	$39,700	5	$12,450	13
Building used as
borrower's home and
place of business	1	6,000	1	6,000			1
Building used as
borrower's home and
for other purposes			1	2,500
Building used as
borrower's place of
business	1	4,000	1	7,000
Building used as
borrower's place of
business and for
other purposes	1	4,000
All other loans	1	4,000	1	2,500	3	5,500	4
Total	29	71,000	24	57,450	8	17,950	18

Purpose	Year	Number	Year	Number	Year
	1923	of loans	1924	of loans	1925
Building used as
borrower's home	$27,760	8	$19,900	10	$19,950
Building used as
borrower's home and
place of business	8,000	1	3,500
Building used as
borrower's home and
for other purposes		1	1,600	1	3,300
Building used as
borrower's place of
business		1	7,000	1	6,500
Building used as
borrower's place of
business and for
other purposes		1	2,000	1	8,000
All other loans	6,000	3	6,000	6	13,500
Total	41,760	15	40,000	19	51,250

All of the above loans were made to stockholders of the petitioner, except one loan of $1,000 in 1922 and one loan of $1,600 in 1924.

The following schedule shows the number of subscribers to the petitioner's stock and the shares of stock subscribed for by them, grouped as to subscribers who did not borrow, subscribers who borrowed during all of the years, and subscribers who borrowed during only one or more of the years under appeal.

	Subscribers	Shares	Per cent of
		subscribed for	total shares
Subscribers who did not borrow during
any year under appeal	18	1,330	69.8
Subscribers who borrowed during
all of the years under appeal	44	438	22.4
Subscribers who borrowed during
one or more of the years under appeal	39	184	9.5
Total	101	1,952	100.0

The rate of interest charged by the petitioner to borrowers during the years in question was 9 3/4 per cent per annum, which remained the same during the life of the loan. Each payment on the loan was credited to the principal and interest charged on the unpaid balances.

During the fiscal years ending March 31, dividends were credited to the stockholders as follows:

Year	Amount	Rate of dividend
1921	$1,778.00	60.6
1922	4,107.92	40.7
1923	4,572.54	23.1
1924	$5,671.56	19.1
1925	7,785.48	19.1
1926	8,784.08	14.5

Dividends were declared in April of each fiscal year. All dividends were paid to each stockholder on the same basis, viz., on the amount paid by each stockholder for stock, plus dividends previously credited to his account, up to the date such dividends were effective.

During each of the years involved in this appeal the State Examiner of the State of North Dakota issued a "Certificate of Authority" to the petitioner, certifying that the petitioner had in all respects complied with the requirements of chapter 26 of the Civil Code of North Dakota relating to building and loan associations.

The petitioner has been exempted from taxation by the State of North Dakota for each of the years involved in this appeal.

The return of the petitioner for the fiscal year ended March 31, 1921, was filed with the collector of internal revenue on May 27, 1921, and no agreement has been entered into extending the time within which taxes for said year may be assessed or collected. The notice of deficiency for the fiscal year ended March 31, 1921, was mailed to the petitioner by the Commissioner on July 1, 1926.

OPINION.

PHILLIPS: This case was heard before the decision of the Supreme Court was rendered in . The arguments advanced by counsel for the respondent are substantially the same as were advanced on behalf of the United States in that case. We are of the opinion that upon the authority of that decision the petitioner is to be classified as a building and loan association.

Since substantially all of its loans were made to members, it meets all of the requirements of section 231 of the Revenue Acts of 1921 and 1924 and is exempt from income tax. See .

Decision will be entered for the petitioner in each proceeding.