Acklin v. People's Sav. Ass'n

• Decision Date: 23 August 1923
• Parties: ACKLIN v. PEOPLE'S SAV. ASS'N.
• Court: U.S. District Court — Northern District of Ohio

293 F. 392

ACKLIN v. PEOPLE'S SAV. ASS'N.

United States District Court, N.D. Ohio, Western Division.

August 23, 1923

E. H Ray, of Toledo, Ohio, for plaintiff.

Marshall & Fraser, of Toledo, Ohio, for defendant.

KILLITS District Judge.

This suit was brought by a member and stockholder of the People's Savings Association to restrain the defendant from (a) filing income tax or capital stock tax returns; (b) from paying any alleged taxes; and (c) from dismissing a suit now pending wherein the association is plaintiff and the collector of internal revenue is defendant, in which the association asks an injunction restraining infringements of its alleged right of exemption. The plaintiff prays for a temporary restraining order, while the defendant moves to dismiss.

The bill alleges, in substance: That the People's Savings Association is a building and loan association organized and doing business under the laws of Ohio, and has been such for about 40 years; that it conducts its business on a strictly mutual basis and confines its business to making loans to members; that the association has something like 15,000 members, and that, if it should voluntarily or under duress, pay out a substantial amount of money as for taxes, a proper distribution of earnings among its members cannot be made, even if it shall thereafter be held that the taxes were illegally assessed; that the association proposes to follow the statutory remedy provided by section 3224 et seq., Revised Statutes (Comp. St. 5947 et seq.) intending to pay capital stock taxes, to file returns of income taxes, if necessary, to pay income taxes, and to proceed for the protection of its rights by filing claims for refund and by suit for recovery, and it is alleged that, if the association follows this course, an irreparable injury will be suffered by the association and its members, because of the delays which will inevitably ensue; that, upon the facts alleged, the remedy provided by section 3224 et seq. is utterly inadequate in the circumstances of this case, and that the plaintiff and the association have no remedy, save and except in a court of equity; that the association is exempt from taxation, and that the acts of the tax authorities in holding it subject to taxation, and in demanding payment of alleged taxes and filing of tax returns are without color, appearance, or a semblance of authority; that, some time ago, in response to demands from the collector of internal revenue for the payment of capital stock taxes, and for the filing of income tax returns, the association filed in this court a suit against the collector to enjoin the enforcement of his demands, and that such suit is now pending herein on the motion of the defendant to dismiss, and on the motion of the plaintiff association for leave to amend, and that the association now proposes to dismiss this suit, and to proceed under section 3224 et seq., Revised Statutes.

The right of the plaintiff in this case to maintain this suit against the association, notwithstanding the determination may not be binding upon the government, seems clear upon the authorities, especially because of the exemption plaintiff and other members are entitled to if their association is so conducted as to be entitled to such consideration. Brushaber v. Union Pacific Railroad Co., 240 U.S. 1, 36 Sup.Ct. 236, 60 L.Ed. 493, L.R.A. 1917D, 414, Ann. Cas. 1917B, 713; Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429, 15 Sup.Ct. 673, 39 L.Ed. 759; Smith v. Kansas City Title Co., 255 U.S. 180, 41 Sup.Ct. 243, 65 L.Ed. 577. The plaintiff's petition is therefore filed in his own right and to assert a right of the association.

While it is a settled practice, by decision of the Supreme Court in the Dupont and other cases, that the remedy of a taxpayer is in the Bureau of Internal Revenue under section 3224 et seq., Revised Statutes, and that ordinarily he may not enjoin the collection of a tax, but must pay the tax and seek a refund in the department, nevertheless the existence of exceptional cases is recognized. Dodge v. Osborn, 240 U.S. 118, 36 Sup.Ct. 275, 60 L.Ed. 557; Hill v. Wallace, 259 U.S. 44, 42 Sup.Ct. 453, 66 L.Ed. 822. It is easily conceivable that there are and must be cases in which the rights and property of a taxpayer will be utterly destroyed, if he is compelled to pay an alleged tax and pursue his remedy in the department, wherefore, when the facts clearly show that the pursuit of the ordinary statutory remedy will inevitably result in such destruction, a court of equity may take jurisdiction to grant relief and to furnish an adequate remedy. This, of course, should be done only in the most extraordinary cases, for the collection of revenue necessary to the support and maintenance of the government ought not be interrupted by litigation, unless exceptional and grave conditions obtain.

Two questions for us are raised by the several motions: (1) Is the People's Savings Association exempt from taxation under the Revenue Act of 1921? (2) Has the plaintiff or the Association an adequate remedy at law? Considering them, we have difficulty in finding a reason underlying the refusal of the Commissioner of Internal Revenue to recognize the exemption of the People's Savings Association. The Revenue Act of 1921 provides for the exemption of 'domestic building and loan associations, substantially all the business of which is confined to making loans to members.' 42 Stat. 253, Sec. 231(4). Upon the allegations of the bill, it appears that the association is a domestic building and loan association, that it is strictly mutual in all its operations, and that it is operated for the benefit of all its members, and not for the benefit of a few, or for any group. Its business is confined to making loans to members; that is to say, loans are made only to persons who qualify as members in accordance with the constitution and by-laws, which provide that a person may become a member of the association for the purpose of making a loan by subscribing for $1 of loan stock. The association has required the subscription of $1 of loan stock and no more as the qualification of membership since 1895, wherefore it is apparent that this basis of qualification was not set up as a subterfuge, or for the purpose of evading the incidence of the Revenue Act of 1921.

The petition shows that mutuality is accomplished as fully by requiring the subscription of $1 of loan stock as if more were required. Regarding the practice of the association, as alleged, to make monthly credits on loans, it would not seem to make much difference in the result whether the borrower subscribes for $1 of stock or for an amount equal to the face of his loan, because each month the amount of his payments are credited on his loan and in that way he gets his share of the benefits of the association. It appears from the petition and from official communications of the Treasury Department, exhibited in connection with the presentation of the motions now before the court, however, that the issue between the Commissioner of Internal Revenue, on the one hand, and the People's Savings Association, on the other hand, is on this very question, whether or not a person becomes a bona fide member of the association by subscribing for $1 of loan stock. In a letter written by the collector of internal revenue to the defendant association, under date of June 11th, the collector quotes the following from the Treasury Department:

'In order to constitute a borrower, a bona fide member within the meaning of the law, he must have a substantial interest in the profits and burdens of the association. The evidence furnished in this case clearly indicates a policy to require subscription to only a nominal amount of stock by persons borrowing funds. It is therefore apparent that the association does not come within the language of the law defining a domestic building and loan association as one substantially all the business of which is confined to making loans to members.'

There was also submitted to us an opinion by the Solicitor of the Internal Revenue as follows:

'Deputy Commissioner Chatterton: Receipt is acknowledged of your memorandum of March 20th, transmitting to this office the case of the People's Savings Association, Toledo, Ohio, for advice as to the taxable status of this organization. Attorneys for the taxpayer have been fully heard. It appears that the association in question issues only installment stock at the present time. This is of two classes: (a) Running deposit stock, on which payments are not paid periodically but are made at the convenience of the purchaser; (b) running weekly payment stock, on which a definite amount is paid each week. On January 31, 1922, there was outstanding installment stock on which there had been

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