AC Inv. Ass'n v. Helvering, 5856.

• Decision Date: 13 November 1933
• Docket Number: No. 5856.,5856.
• Citation: 68 F.2d 386
• Parties: A-C INV. ASS'N, Unincorporated, v. HELVERING, Commissioner of Internal Revenue.
• Court: U.S. Court of Appeals — District of Columbia Circuit

68 F.2d 386 (1933)

A-C INV. ASS'N, Unincorporated, v. HELVERING, Commissioner of Internal Revenue.

No. 5856.

Court of Appeals of the District of Columbia.

Argued October 12, 1933.

Decided November 13, 1933.

R. C. Fulbright and John C. White, both of Washington, D. C., for petitioner.

G. A. Youngquist, Sewall Key, Carlton Fox, C. M. Charest, and Walter L. Barlow, all of Washington, D. C., for respondent.

Before MARTIN, Chief Justice, and ROBB, VAN ORSDEL, HITZ, and GRONER, Associate Justices.

GRONER, Associate Justice.

This is a tax case, and it is here on petition to review a decision of the Board of Tax Appeals entered November 5, 1931. A condensed statement of the Board's findings is as follows:

Petitioner operates in Houston, Tex. It is not incorporated, but had a constitution and by-laws in which the purposes and objects of its organization are set forth. It began to function in 1920. Article II of its constitution provides:

"This association is formed by the employees of Anderson, Clayton & Co. of Houston, Texas, and affiliated organizations for the purpose of providing investment fund for the mutual benefit of the employees contributing thereto."

Article III.

"Membership shall consist of units or shares deposits of a par value of ten dollars ($10.00) each. These units may be purchased by any employee of Anderson, Clayton & Co. Each deposit of $10.00 was equal to one unit. Units are purchasable only for cash and memberships are not transferable."

At the time of organization the employees of Anderson, Clayton & Co. (a large cotton corporation with hundreds of employees) were investing their savings in speculative oil stocks of doubtful value. To avoid the losses which it was recognized would likely ensue from this class of investment and to provide an opportunity to them to deposit their funds in a central agency for security and for investment, the organization was effected. The control was lodged in an executive committee consisting of nine contributing members elected annually. This committee was required to hold meetings at least once in each quarter and was authorized to use the deposits of members to make loans and investments in accordance with by-laws of the association. It was charged with the duty of electing a president, vice president, and secretary-treasurer from its own members. At the annual or other meetings of the association, all members might vote in person or by proxy, and each member was entitled to one vote for each of the units described in article III of the constitution standing in his name. Membership was restricted to employees of the cotton corporation and its affiliates. No member could deposit in excess of $1,200 (120 units) annually. The organization issued passbooks similar to those used by savings banks, in which were noted all deposits, each $10 deposit being equal to one unit or to one vote in stockholders' meetings. Deposits could be withdrawn, not by check, but by entry in the passbooks of the withdrawal, and the memberships evidenced by the passbooks were not transferable. The officers received no salary, and the organization's place of business was in the office building of the cotton company which furnished rent free. The membership increased from 36 at organization to 444 in 1927, and the deposits from less than $10,000 in the early period to more than $800,000 in 1928. The assets consisted of real estate notes purchased through trust companies and trust departments in banks, stock in building-loan associations, first mortgage loans made direct to borrowers, a comparatively insignificant amount loaned to members on passbooks, and cash to meet withdrawals of deposits. The association loaned to its members on first mortgage notes in some instances 80 per cent. of the cost of homes built by such members. Its average earnings were slightly in excess of 7 per cent. Severance of relations with the cotton company terminated the voting rights of members of the association at annual meetings. All of the earnings were prorated quarterly on the basis of individual deposits. On the back of the passbook issued by petitioner to depositors was the following legend: "The object of this association is to promote habits of thrift, and create a spirit of cooperation and mutual interest among the employees of Anderson, Clayton & Co., and to provide a means of profitable investment of savings."

Petitioner annually advised each of its members as to what his earnings from the institution had been in order that he might report them for individual income tax purposes. In the third year of its operation, it issued a circular to its members in which it stated its objects and policies as follows: "This Association is an unincorporated mutual savings institution. Funds received from members in payment for units of interest are invested in conservative real estate mortgage and high-class bonds." The methods of operation were modeled upon those of stock savings banks operating in Houston, except that interest was distributed entirely on deposits, and no salaries were paid and no certificates of stock issued. Passbooks for deposits were not transferable. A reserve of 15 per cent. in cash was maintained to meet withdrawals.

The question in the case is, Was petitioner a "mutual savings bank not having a capital stock represented by shares" so as to entitle it to exemption from taxation under section 231 (2) of the Revenue Act of 1921, 1924, and 1926 (42 Stat. 253; 43 Stat. 282; 44 Stat. 39, 26 USCA § 982 (2)? The Commissioner held that the petitioner was not exempt, and the Board of Tax Appeals sustained the Commissioner, holding that petitioner was an association in the nature of a corporation and not a mutual savings bank, and consequently was not entitled to exemption. The Board apparently relied on Sears, Roebuck & Co. Employees' Sav. & Profit-Sharing Pension Fund v. Commissioner (C. C. A.) 45 F.(2d) 506.

The Commissioner insists here that petitioner, both by reason of its structure and by the fact that it is doing business like a corporation, is an "association" within the meaning of section 2 (2) of the Revenue Act of 1921 (42 Stat. 227), which provides that the term "corporation" shall include associations, joint-stock companies, and insurance companies.

The question we have to decide is not without difficulty, but, after careful consideration, we have reached the conclusion that within the intent of Congress, as expressed in the exemption to which we have called attention, petitioner is a mutual savings bank whose income is nontaxable. At the time of its organization, the then departmental construction of the statutory exemption undeniably placed petitioner within the exempt class. See O. D. 528, 2 C. B. 207; and O. D. 703, 3 C. B. 235. In the latter of these decisions, it was held that an association of the employees of N. Company, formed for the purpose of enabling its members to save and borrow money, was exempt as a mutual savings bank. There, as here, membership was limited to employees who selected a board of trustees to manage their affairs. Each member was permitted to subscribe to from one to twenty-five shares of stock represented by certificates of deposit, and was entitled to the return of the money paid in and the earnings thereon at the end of the year, or could allow both to remain on deposit. Members were also permitted to borrow from the association. The language of the decision is as follows:

"Held that the shares of stock sold by the association are merely the means to assist the members in accumulating their savings and that they do not constitute capital stock within the accepted business meaning of that term. The dividends paid thereon are in reality interest on deposits (see 28 Op. A. G. 189; 31 Id. 176); and the association is exempt under section 231 (2) of the Revenue Act of 1918 as a mutual savings bank not having a capital stock represented by shares."

The decision first above mentioned is equally apt. However, after the 1921 act (which was in all respects similar to the 1918 act, so far as is pertinent), a contrary decision was made, being S. M. 1697, III-1 C. B. 248; and, after the 1924 act, likewise similar, another, being S. M. 2268, III-2 C. B. 208. Too great reliance may not, therefore, be placed upon these departmental rulings as indicating a uniform departmental construction, and we must have recourse to the facts as we find them to lead us to the decision we should reach.

It is conceded by the government in the brief and in the argument that, in order to come within the definition of savings banks, such institutions as petitioner need not be incorporated. It is likewise conceded that it is not necessary that they should be under public supervision unless, in either case, a state statute so requires. And it is finally conceded that there was no statute in Texas requiring such an institution to be incorporated or to submit to supervision.

We must therefore look for a definition of "savings bank" to those decisions rendered prior to the policy adopted by some of the states of requiring or permitting that they be chartered as an ordinary commercial corporation is. A case in point is Huntington v. Savings Bank, 96 U. S. 388, 24 L. Ed. 777. There the Supreme Court, defining the basic characteristics of savings banks, said (page 394 of 96 U. S., 24 L. Ed. 777): "Its purpose is rather to furnish a safe depositary for the money of those members * * * disposed to intrust their property to its keeping. It is somewhat of the nature of such corporations as church-wardens for the conservation of the goods of a parish, the college of surgeons for the promotion of medical science, or the society of antiquaries for the advancement of the study of antiquities. Its purpose is a public advantage, without any interest in its members." The opinion further points out that a savings bank's powers are to receive deposits for the use and benefit of the...