Minster Loan & Sav. Co. v. Commissioner

MINSTER LOAN & SAVINGS CO., PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Minster Loan & Sav. Co. v. Commissioner

Docket No. 11899.

United States Board of Tax Appeals

12 B.T.A. 610; 1928 BTA LEXIS 3499;

June 14, 1928, Promulgated

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The petitioner, upon the evidence, held not to be a building and loan association within the meaning of section 231(4) of the Revenue Act of 1921.

L. L. Hamby, Esq., for the petitioner.

J. E. Marshall, Esq., for the respondent.

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SIEFKIN

This is a proceeding for the redetermination of a deficiency in income taxes for the calendar year 1922, in the amount of $250. The total amount of tax in controversy is $5,815.92, which includes $5,565.92 already assessed, a claim for the abatement of which was denied by the respondent.

The error assigned is the holding of the respondent that the petitioner, during the year in question, was not a domestic building and loan association within the meaning of the Revenue Act of 1921.

FINDINGS OF FACT.

Petitioner was incorporated on August 30, 1893, under the laws of the State of Ohio with its principal office at Minster, Ohio.

The constitution of the petitioner provided:

This Association is organized for the purpose of raising money to be loaned to its members and others, and for such other purposes as are authorized by law.

During the year 1922, petitioner purchased mortgages aggregating $66,800, and the mortgagees were required to, and did become members by subscribing for and acquiring stock.

During the year 1922, petitioner made loans to members secured by real estate mortgages in the amount of $70,631.19, loans to members secured by pass-book stock in the amount of $600, and loans to members secured otherwise than by mortgages on real estate or stock of the association in the amount of $5,000, and made loans to nonmembers during the year in the amount of $800.

Petitioner had mortgage loans outstanding at the end of the years 1921 and 1922 in the respective amounts of $1,090,987.50 and $1,058,212.20.

The number of shares of loan stock outstanding at the beginning and end of the year 1922 was 10,910 and 10,583 shares, respectively; and during the year $18,456.30 was credited on this stock.

A charge of 10 cents per share was made to subscriptions of running or paid-up stock during the year as an initiation fee to defray the expense of printing mortgages, etc.

The rate of interest on farm mortgage loans was 6 per cent; and on other loans the interest rate varied from 6 per cent to 8 per cent.

Farm mortgage-loan payments were generally made semiannually on January 1, and July 1, although borrowers had the privilege of making payments in a minimum amount of $25 or more at any time during the year.

Loans on homes were payable weekly or monthly, at the option of the borrower at the rate of 25 cents per week on each $100 borrowed.

During the year 1922, approximately 80 per cent of petitioner's income was derived from loans outstanding during the year 1922 to nonmembers or nonstockholders based upon the amount of loans outstanding at the end of the year.

Petitioner's balance sheet at the end of the year 1921 was as follows:

December 31, 1921
Assets:
Cash	$3,750.28
Loans	1,107,917.50
Furniture and fixtures	2,230.10
Real estate	6,377.22
Real estate sold on contract	580.00
Office building	5,824.26
Accounts receivable	79.84
Bonds and war savings stamps	6,716.80
Deposits on building and loans	31,000.00
	1,164,476.00
Liabilities:
Running stock	967,218.02
Paid-up stock	74,800.00
Credits on loans	74,926.94
Contingent profit	72.43
Credits on pass books	1,038.89
Reserve fund	24,832.81
Undivided profits	11,586.91
	1,164,476.00

Petitioner's balance sheet at the end of the year 1922, was as follows:

December 31, 1922
Assets:
Cash on hand	$12,263.46
Loans on mortgage security	1,058,212.20
Loans on stock certificate or pass-book security	1,700.00
Loans on all other security	19,000.00
Furniture and fixtures	2,007.09
Real estate	31,577.22
Real estate sold on contract	3,280.00
Real estate office building	5,824.26
Due from borrowers for insurance and taxes	39.47
Deposits in other building and loan associations	20,000.00
Deposits in other financial institutions	22,000.00
	1,175,903.70
Interest due and uncollected	10,601.74
Liabilities:
Running stock and dividends	964,938.37
Credits on mortgage loans	96,966.26
Credits on other loans	7,438.30
Credit on real estate sold on contract	$363.15
Paid up stock and dividends	72,000.00
Reserved fund	27,214.75
Undivided profit fund	4,938.07
Borrowed money and accrued interest
Contingent profit on real estate sold on contract	844.80
Credits on pass-book loans	1,200.00
Total	1,175,903.70
Interest due and uncollected	10,601.74
Disbursements:
Loans on mortgage security	137,431.19
Loans on stock certificate or pass-book security	600.00
Loans on all other security	5,800.00
Withdrawals of running stock and dividends	235,717.80
Withdrawals of paid-up stock	9,500.00
Borrowed money	19,500.00
Deposits in other financial institutions	48,000.00
Insurance and taxes paid for borrowers	42.30
Real estate (purchase price)	29,754.85
Real estate on contract	4,100.00
Dividends on paid-up stock	3,630.89
Interest on borrowed money	72.93
Salaries of officers and directors	4,859.00
Office held, rent and legal services	807.70
All other expenses	1,727.84
Taxes	2,835.38
Mortgage credits transferred to repay loans	15,022.46
Contingent profits transferred	122,78
Pass-book loan credits transferred	336.37
Distribution (reserve fund)	2,381.94
Distribution (undivided profits)	6,648.84
Dividends transferred to repay loan	8.78
Total	528,901.05
Cash on hand	12,263.46
Total	541,164.51
Receipts:
Dues on running stock	186,749.99
Paid-up stock	6,700.00
Credits on mortgage loans	31,911.45
Loans on mortgage security repaid	170,206.49
Loans on stock certificate or pass book security repaid	1,100.00
Loans on all other security repaid	1,530.00
Borrowed money	19,500.00
Real estate sold	4,554.85
Real estate sold on contract	1,400.00
Insurance and taxes refunded by borrowers	82.67
Interest	57,276.81
Pass-book, initiation, and membership fees	152.25
Rents from company's real estate	274.51
Deposits in other building and loan associations withdrawn	$5,000.00
Deposits in other financial institutions withdrawn	32,000.00
Sale of bonds	6,494.18
Dues on pass-book loans	497.48
Court costs refunded	404.77
Credits on loans on other security	1,234.45
Contingent profit on real estate	895.15
Deposit-box rents	69.35
Credits on real estate sold on contract	139.22
Insurance refunded to company	9.83
War stamps sold	200.00
Distributions	9,030.78
Total	537,414.23
Cash on hand at close of last fiscal year	3,750.28
Total	541,164.51

The loans made by the petitioner were for a period of 5 years, but when the security was good loans were allowed to run on indefinitely.

OPINION.

SIEFKIN: The sole question to be decided in this proceeding is whether, during the year 1922, the petitioner was a building and loan association within the meaning of section 231(4) of the Revenue Act of 1921, which provides:

SEC. 231. That the following organizations shall be exempt from taxation under this title -

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(4) Domestic building and loan associations substantially all the business of which is confined to making loans to members; and cooperative banks without capital stock organized and operated for mutual purposes and without profit.

The evidence discloses that of the total loans made by the petitioner during the year 1922, only $800, slightly over 1 per cent, constituted loans made to nonmembers of the association but that during the same year, approximately 80 per cent of petitioner's income was derived from loans outstanding during the year 1922, to nonmembers or nonstockholders.

In our opinion this large percentage of the income attributable to transactions with nonmembers requires that the petitioner be held not exempt since substantially all its business is not confined to making loans to members. See .

Reviewed by the Board.

Judgment will be entered for the respondent.