La Caisse Populaire Ste-Marie (St. Mary's Bank) v. US, Civ. A. No. 75-383.

CourtUnited States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of New Hampshire
Writing for the CourtDennis M. Donohue, Jerome Fink, Dept. of Justice, Washington, D. C., for defendant
Citation425 F. Supp. 512
PartiesLA CAISSE POPULAIRE STE-MARIE (ST. MARY'S BANK) v. The UNITED STATES of America.
Docket NumberCiv. A. No. 75-383.
Decision Date10 December 1976

425 F. Supp. 512

LA CAISSE POPULAIRE STE-MARIE (ST. MARY'S BANK)
v.
The UNITED STATES of America.

Civ. A. No. 75-383.

United States District Court, D. New Hampshire.

December 10, 1976.


425 F. Supp. 513
COPYRIGHT MATERIAL OMITTED
425 F. Supp. 514
E. Tupper Kinder, Jr., James E. Higgins, Sheehan, Phinney, Bass & Green, Manchester, N. H., for plaintiff

Dennis M. Donohue, Jerome Fink, Dept. of Justice, Washington, D. C., for defendant.

OPINION AND ORDER

BOWNES, District Judge.

This is an action to recover income taxes alleged to be erroneously and illegally assessed and collected by the Internal Revenue Service. The taxpayer claims that it is an exempt organization under Section 501(c)(14)(A) of the Internal Revenue Code. Jurisdiction is conferred on this court by 28 U.S.C. § 1346(a)(1). The issue is whether the plaintiff is a "credit union" within the meaning of Section 501(c)(14)(A) of the Internal Revenue Code.

425 F. Supp. 515

BACKGROUND

The taxpayer, La Caisse Populaire SteMarie (St. Mary's Bank),1 was the first credit union organized in the country. Its charter from the State of New Hampshire on April 9, 1909, came just six days prior to the enactment of a general credit union statute in Massachusetts. New Hampshire did not pass a general credit union statute until 1921.

In 1935, the taxpayer requested that the Treasury Department exempt it from federal income taxation under Section 101 of the Revenue Act of 1934. The Treasury Department granted that exemption on October 5, 1935.

In 1951, Section 101(4) of the Internal Revenue Code, under which credit unions were held to be exempt, was revised. Prior to 1951, credit unions were allowed to claim an exempt status because of their similarity to building and loan associations and cooperative banks. 31 Op.A.G. 6.176 (1917). The Revenue Act of 1951 revoked the exemption of mutual savings banks and savings and loan associations, but, at the same time, exempted credit unions by name for the first time. 26 U.S.C. § 501(c)(14)(A). The words "credit union" are not defined in the Code.

In 1962, the Internal Revenue Service recommended to the Secretary that the taxpayer's exempt status be revoked because it was not being operated as a credit union. The exemption granted in 1935 was revoked in a letter dated January 14, 1966. The taxpayer paid taxes in the years 1969 through 1974 in the following amounts: $0, $4,616.70, $3,824.25, $4,724.16, $32,826.00, and $2,974.00, respectively. The taxpayer filed claims for refunds for the years in question which were disallowed. This action was commenced on December 23, 1975.

The Internal Revenue Service claims that St. Mary's was not operated as a credit union during the years in question and that it was not entitled to the exemption.

SYNOPSIS OF FINANCIAL INSTITUTIONS

Since it is the Government's position that the plaintiff functions as a bank and not as a credit union, it is necessary to examine the history and structure of both the banking system and the credit union movement in this country and the pertinent Federal and State statutes.

The Dual Regulatory System

The dual bank regulatory system with which we find ourselves today is a result of the holding in McCulloch v. Maryland, 4 Wheat (U.S.) 316, 4 L.Ed. 579 (1819), that Congress was able to charter banks under the authority of the "necessary and proper" clause of Article I and the historical regulation of banks by states, reserved to them as a police power under the Constitution. Braeburn Security Corp. v. Smith, 15 Ill.2d 55, 153 N.E.2d 806 (1958), appeal dismissed, 359 U.S. 311, 79 S.Ct. 876, 3 L.Ed.2d 831 (1959); Farmers & M. Bank v. Federal Reserve Bank, 262 U.S. 649, 43 S.Ct. 651, 67 L.Ed. 1157 (1923); Engel v. O'Malley, 219 U.S. 128, 31 S.Ct. 190, 55 L.Ed. 128 (1911); Noble State Bank v. Haskell, 219 U.S. 104, 31 S.Ct. 186, 55 L.Ed. 112 (1911); Opinion of Justices, 102 N.H. 106, 151 A.2d 236 (1959). Other cases which have upheld the Federal Government's constitutional authority to charter financial institutions include: First National Bank v. Walker Bank & Trust Co., 385 U.S. 252, 87 S.Ct. 492, 17 L.Ed.2d 343 (1966); Franklin National Bank v. New York, 347 U.S. 373, 74 S.Ct. 550, 98 L.Ed. 767 (1954); Texas & P. R. Co. v. Pottorff, 291 U.S. 245, 54 S.Ct. 416, 78 L.Ed. 777 (1934); Smith v. Kansas City Title & T. Co., 255 U.S. 180, 41 S.Ct. 243, 65 L.Ed. 577 (1921); First National Bank v. Fellows, 244 U.S. 416, 37 S.Ct. 734, 61 L.Ed. 1233 (1917); Osborn v. Bank of United States, 9 Wheat (U.S.) 738, 6 L.Ed. 204 (1824).

As a result, both Congress and the states may charter a variety of financial institutions. Today there are three types of federally chartered financial institutions:

425 F. Supp. 516
national associations, federal savings and loan associations, and federal credit unions

National Banks

National associations, or national banks, are primarily commercial banks. They have the option of becoming members of the Federal Reserve, in which case they will be supervised by the Federal Reserve. All national banks are subject to the rules of the Comptroller of the Currency, an official of the Treasury Department, and all must have their deposits insured by the Federal Deposit Insurance Corporation. See generally 12 U.S.C., chs. 1, 2, 3, & 16.

Varying amounts, depending upon the size of the locality in which the bank proposes to operate, are required to be contributed to the association in return for capital stock. 12 U.S.C. § 51. National banks are permitted to form branches pursuant to state law. 12 U.S.C. § 36. Apart from the reserve requirements of the respective bank regulatory agency, national banks are permitted to make loans or investments for all of the purposes permitted to any financial institution. Traditionally, national banks, like all commercial banks, have favored short-term business loans, although they are permitted and do maintain a smaller percentage of their assets in consumer loans, real estate loans, and others.

The other noteworthy feature about national banks, and other commercial banks, is that they are permitted to accept both demand deposits and time deposits. Demand deposits are deposits of funds which are payable on demand. Time deposits cannot legally be required to be paid until a certain time or day or a certain number of days after the deposit is made. In addition to these two kinds of deposits, a third, certificates of deposit, are time deposits for longer periods of time, usually yielding higher rates of interest. Most checking accounts are demand deposits.2 Savings accounts are always time deposits.3 There is also a general prohibition on the payment of interest on demand deposits.

Federal Savings and Loan Associations

The Federal Home Loan Bank Board was established in 1932 by the Federal Home Loan Bank Act. 12 U.S.C. § 1421 et seq. In 1933, it was given the authority to charter and supervise federal savings and loan associations. 12 U.S.C. § 1464 et seq. Savings and loan associations, in contrast with national banks and other commercial banks, were formed by Congress:

In order to provide local mutual thrift institutions in which people may invest their funds and in order to provide for the financing of homes . . .. 12 U.S.C. § 1464(a).

Savings and loan associations still keep the great bulk of their assets in home mortgages. 12 U.S.C. § 1464(c). As mutual associations, they do not raise money through the sale of capital stock, but only through the solicitation of deposits. 12 U.S.C. § 1464(b)(1) and 12 C.F.R. § 543.3. The earned surplus technically belongs to the depositors, but, because dividend rates are restricted, they only receive them in regulated amounts unless the association is liquidated. The depositor-owners do not have any control over the management of the institution which is run by a self-perpetuating board of directors. 12 C.F.R. § 543.6. Except in New Hampshire and Massachusetts, where N.O.W. accounts are permitted:

accounts in a Federal association shall not be subject to check or to withdrawal or transfer on negotiable or transferable order or authorization to the association. 12 C.F.R. § 545.4-1(a)(1).

The Federal Savings and Loan Insurance Corporation insures all federal savings and loan associations.

425 F. Supp. 517

Federal Credit Unions

1934 was a fertile year for the creation of new financial institutions. Not only did Congress create federal savings and loan associations, but it also passed the Federal Credit Union Act. Federal credit unions are now regulated by the National Credit Union Administration which also insures many state chartered credit unions. One principal difference between credit unions and other federally chartered financial institutions lies in the democratic control and management of credit unions. Although savings and loan associations are also mutual associations, depositors do not have any say in the election of the directors who compose a self-perpetuating board. 12 U.S.C. §§ 1760 & 1761 mandate democratic control of all federal credit unions.4

No member shall be entitled to vote by proxy, but a member other than a natural person may vote through an agent designated for the purpose. Irrespective of the number of shares held by him, no member shall have more than one vote. 12 U.S.C. § 1760.

Federal credit unions are not subject to taxation under the Internal Revenue Code. 26 U.S.C. § 501(c)(1) and 12 U.S.C. § 1768. 12 U.S.C. § 1759 requires that:

Federal credit union membership shall be limited to groups having a common bond of occupation or association, or to groups within a well-defined neighborhood, community, or rural district.

The common bond requirement, together with the statutes which specify democratic control, are what most set federal credit unions apart from federal savings and loan associations.

The Federal Credit Union Act limits the loans which can be made and the assets which can be held by an institution chartered under its...

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5 practice notes
  • Barany v. Buller, No. 80-1458
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • February 10, 1982
    ...in North America was organized in Quebec, Canada. St. Mary's Bank, the plaintiff in La Caisse Populaire Ste-Marie v. United States, 425 F.Supp. 512 (D.N.H.1976), aff'd, 563 F.2d 505 (1st Cir. 1977), was the first credit union organized in the United States, receiving its charter only six da......
  • TI Federal Credit Union v. Delbonis, Civ. A. No. 94-11723-RCL.
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts
    • June 7, 1995
    ...willing to act as directors, and democratic control of the institution." Id. at 551, citing La Caisse Populaire Ste-Marie v. U.S., 425 F.Supp. 512, 517 (D.N.H.1976). The court concluded: Clearly, credit unions are different from banks and not in direct competition with each other as suggest......
  • Cheshire Nat. Bank v. Smith, Civ. A. No. 76-94.
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of New Hampshire
    • February 22, 1977
    ...the distinctions between financial institutions see La Caisse Populaire Ste.-Marie (St. Mary's Bank) v. The United States of America, 425 F.Supp. 512 (D.N.H. 2 NOW accounts were actually first offered by savings banks in Worcester, Massachusetts, and Concord, New Hampshire, without authorit......
  • La Caisse Populaire Ste. Marie v. U.S., No. 77-1129
    • United States
    • U.S. Court of Appeals — First Circuit
    • September 30, 1977
    ...Section 501(c)(14)(A) of the Internal Revenue Code of 1954 for the years in question. La Caisse Populaire Ste. Marie v. United States, 425 F.Supp. 512 On appeal the United States argues that St. Mary's is a hybrid mutual savings/commercial bank and not a credit union. Citing the nature of t......
  • Request a trial to view additional results
5 cases
  • Barany v. Buller, No. 80-1458
    • United States
    • United States Courts of Appeals. United States Court of Appeals (7th Circuit)
    • February 10, 1982
    ...in North America was organized in Quebec, Canada. St. Mary's Bank, the plaintiff in La Caisse Populaire Ste-Marie v. United States, 425 F.Supp. 512 (D.N.H.1976), aff'd, 563 F.2d 505 (1st Cir. 1977), was the first credit union organized in the United States, receiving its charter only six da......
  • TI Federal Credit Union v. Delbonis, Civ. A. No. 94-11723-RCL.
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of Massachusetts
    • June 7, 1995
    ...willing to act as directors, and democratic control of the institution." Id. at 551, citing La Caisse Populaire Ste-Marie v. U.S., 425 F.Supp. 512, 517 (D.N.H.1976). The court concluded: Clearly, credit unions are different from banks and not in direct competition with each other as suggest......
  • Cheshire Nat. Bank v. Smith, Civ. A. No. 76-94.
    • United States
    • United States District Courts. 1st Circuit. United States District Courts. 1st Circuit. District of New Hampshire
    • February 22, 1977
    ...the distinctions between financial institutions see La Caisse Populaire Ste.-Marie (St. Mary's Bank) v. The United States of America, 425 F.Supp. 512 (D.N.H. 2 NOW accounts were actually first offered by savings banks in Worcester, Massachusetts, and Concord, New Hampshire, without authorit......
  • La Caisse Populaire Ste. Marie v. U.S., No. 77-1129
    • United States
    • U.S. Court of Appeals — First Circuit
    • September 30, 1977
    ...Section 501(c)(14)(A) of the Internal Revenue Code of 1954 for the years in question. La Caisse Populaire Ste. Marie v. United States, 425 F.Supp. 512 On appeal the United States argues that St. Mary's is a hybrid mutual savings/commercial bank and not a credit union. Citing the nature of t......
  • Request a trial to view additional results

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