Central Bldg., Loan & Sav. Co. v. Bowland

• Decision Date: 11 May 1914
• Docket Number: 1674.,1672
• Citation: 216 F. 526
• Parties: CENTRAL BUILDING, LOAN & SAVINGS CO. v. BOWLAND, Internal Revenue Collector. BELLEFONTAINE BUILDING & LOAN CO. v. McMAKEN, Internal Revenue Collector.
• Court: U.S. District Court — Southern District of Ohio

216 F. 526

CENTRAL BUILDING, LOAN & SAVINGS CO. v. BOWLAND, Internal Revenue Collector.

BELLEFONTAINE BUILDING & LOAN CO. v. McMAKEN, Internal Revenue Collector.

Nos. 1672, 1674.

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

May 11, 1914

L. F Sater, of Columbus, Ohio, F. L. Wells, of Wellsville, Ohio and Andrew J. Hess, of Sidney, Ohio, for plaintiff Central Building, Loan & Savings Co.

J. E West, of Bellefontaine, Ohio, F. L. Wells, of Wellsville Ohio, and Andrew J. Hess, of Sidney, Ohio, for plaintiff Bellefontaine Building & Loan Co.

Sherman T. McPherson, of Cincinnati, Ohio, for defendants.

HOLLISTER District Judge.

These were removed to this court by the defendants in the respective cases, the first from the Franklin common pleas, and the second from the Logan common pleas, and the records in each certified to this court. The respective plaintiffs had paid under protest the tax imposed by the act of Congress, Aug. 5, 1909, c. 6, Sec. 38, 36 Stat. 112 (U.S. Comp. St. Supp. 1911, p. 946), known as 'special excise tax on corporations,' and these suits were brought to recover the amounts paid. The defendant in each case, the collector of internal revenue to whom the tax was paid, hereinafter called the government, demurs for that the petition against him does not state facts sufficient to constitute a cause of action.

So much of the act as this controversy involves provides:

'Sec. 38. That every corporation, joint stock company or association, organized for profit and having a capital stock represented by shares, * * * shall be subject to pay annually a special excise tax with respect to the carrying on or doing business by such corporation, joint stock company or association, * * * equivalent to one per centum upon the entire net income over and above five thousand dollars. * * * Provided, however, That nothing in this section contained shall apply to labor, agricultural or horticultural organizations, or to fraternal beneficiary societies, orders, or associations operating under the lodge system, and providing for the payment of life, sick, accident, and other benefits to the members of such societies, orders, or associations, and dependents of such members, nor to domestic building and loan associations, organized and operated exclusively for the mutual benefit of their members, nor to any corporation or association organized and operated exclusively for religious, charitable, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual.'

For the purposes of these demurrers, the plaintiffs are assumed, under the allegations in their respective pleadings, to have been organized under the Ohio Laws, as now found in 4 Page and Adams Annotated Ohio Gen. Code (1911) Sec. 9643 et seq., under the title: 'Division IV. Building and Loan Associations, Chapter 1. Organization and Powers.'

Section 9643 reads:

'A corporation for the purpose of raising money to be loaned to its members, and others, shall be known in this chapter, * * * as a 'building and loan association,' or as a 'savings association.' Associations organized under the laws of this state shall be known as 'domestic' associations, and those organized under the laws of other states or territories, as 'foreign' associations.

Associations may be organized and conducted under the general laws of Ohio relating to corporations, except as otherwise provided in this chapter.'

Among the powers given Ohio domestic building and loan associations are:

'Sec. 9648. To receive money on deposits, and all persons, firms, corporations and courts, their agents, officers and appointees may make such deposits and stock deposits, but such corporation shall not pay interest thereon exceeding the legal rate. * * *

'Sec. 9649. To issue stock to members on such terms and conditions as the constitution and by-laws provide. Each member may vote his stock in whole or fractional shares, as the constitution and by-laws provide, but no person shall vote more than twenty shares in any such corporation in his own right, nor have the right to cumulate his votes. But every subscriber for stock in accordance with the constitution of the association, may vote the amount of stock so subscribed for, in no event to exceed twenty shares.

'Sec. 9650. To assess and collect from members and others, such dues, fines, interest and premium on loans made, or other assessments, as may be provided for in the constitution and by-laws. Such dues, fines, premium or other assessments shall not be deemed usury, although in excess of the legal rate of interest.

'Sec. 9651. To permit members to withdraw all or part of their stock deposits, at such times, and upon such terms, as the constitution and by-laws provide. Any member, however, who withdraws his entire stock deposit, or whose stock has matured, shall be entitled to receive all dues paid in and dividends declared thereon, less all fines or other assessments and less the pro rata share of all losses, if any have occurred.

'Sec. 9652. To permit withdrawal of deposits upon such terms and conditions as the association provides except by check or draft. But no such association shall be permitted to carry for any member or depositor any demand, commercial or checking account. Nothing in this chapter shall prevent members or depositors from withdrawing funds by non-negotiable orders.

'Sec. 9653. To cancel shares and parts of shares of stock upon which the credits have been withdrawn, or upon which loans have been repaid, and reissue them as new stock.'

'Sec. 9656. To borrow money, not exceeding twenty per cent. of the assets, and issue its evidence of indebtedness or other security therefor.

'Sec. 9657. To make loans to members and others on such terms, conditions and securities as may be provided by the association.'

The allegations in the respective petitions which raise the question to be decided are, as to the first named plaintiff, 'that plaintiff for the mutual benefit of all its members receives deposits from, and loans money to persons who are not members, said acts being duly authorized by the law of Ohio;' and, as to the second named plaintiff, 'that since its organization said plaintiff has by its constitution provided that it is organized for the purpose of raising money to be loaned to its members and to others and for the purpose of receiving money on deposit from time to time to the extent necessary to meet the demand made on it by its members, depositors and others; that, since its organization, said plaintiff has by its by-laws provided for the carrying out of each of said purposes, and has, from time to time, received deposits upon which it paid to the depositors the amount of interest due thereon, in accordance with the rate and terms upon which the deposits were made; that notwithstanding the said provisions of its constitution and by-laws authorizing the same, it has not made any loans to others than its members; and by virtue of the laws of the state of Ohio the plaintiff is, and at all times has been, authorized and empowered to make loans to persons who are not members and to receive deposits from persons who are not members and to pay interest on deposits made by such persons. ' The plaintiffs claim exemption from the tax under the proviso in the act. The government denies exemption on the ground, as to the first named plaintiff, that 'the corporation makes loans to and receives deposits from other than members, and that accordingly in addition to its mutual features it does a business akin to a general banking business; ' and, as to the second named plaintiff, that it is a corporation 'organized for the purpose of raising money to be loaned to members and others, and that it is qualified to receive deposits or borrow funds from other than members, ' and, therefore, the government claims that these associations cannot be considered as organized and operated for the 'exclusive benefit,' or 'exclusively for the mutual benefit,' of their respective members. The government admits that the plaintiffs are domestic building and loan associations having features of mutuality between their members.

No claim is made by the government that under the Ohio laws different classes of«capital stock may be issued, and for that reason there is a lack of mutuality between members, so that question may not be directly involved; but, since its discussion bears pertinently on the question to be decided here, some reference to it may be of value. It may be said that, even if the laws of Ohio empowered the directors to provide for different classes of stock, there are a number of cases to the point that the mutuality essential to such associations is not affected. Latimer v. Investment Co. (C.C.) 81 F. 776; Manship v. Building & Loan Ass'n (C.C.) 110 F. 845, 853; Wilson v. Parvin, 119 F. 652, 56 C.C.A. 268; People v. Preston, 140 N.Y. 549, 35 N.E. 979, 24 L.R.A. 57. The reason is that, even when the state laws do not give the power expressly, or the power is not necessarily to be inferred from them, to issue such stock, yet if there is nothing in the law to prohibit, and the issuing of such shares is for the purpose of obtaining the money which shall be used to promote the purposes of such association, such division into different classes of shares does not disturb the essential qualities of a 'building association,' such as that term is understood generally by the public and by legislators when enacting general laws on the subject, and a fortiori, when the power is expressly given.

While the description of associations of this kind, as set forth in some of the cases, may be accepted as correct, yet if what is done is only in furtherance of...