Guaranty Employees Association v. United States

• Decision Date: 18 January 1957
• Docket Number: No. 15980.,15980.
• Citation: 241 F.2d 565
• Parties: GUARANTY EMPLOYEES ASSOCIATION, Appellant, v. UNITED STATES of America, Appellee.
• Court: U.S. Court of Appeals — Fifth Circuit

241 F.2d 565 (1957)

GUARANTY EMPLOYEES ASSOCIATION, Appellant, v. UNITED STATES of America, Appellee.

No. 15980.

United States Court of Appeals Fifth Circuit.

January 18, 1957.

William H. Bloch, Corpus Christi, Tex., for appellant.

Charles K. Rice, Asst. Atty. Gen., Lee A. Jackson, Atty., Dept. of Justice, Washington, D. C., Malcolm R. Wilkey, U. S. Atty., Houston, Tex., Harry Baum, Davis W. Morton, Jr., Attys., Dept. of Justice, Washington, D. C., Gordon J. Kroll, Asst. U. S. Atty., Houston, Tex., for appellee.

Before HUTCHESON, Chief Judge, and RIVES and TUTTLE, Circuit Judges.

TUTTLE, Circuit Judge.

The district court held that appellant was not entitled to federal income tax exemption as a "mutual savings bank," within the meaning of Section 101(2) of the Internal Revenue Code of 1939,¹ and that it was an "association" taxable as a corporation, within the meaning of Section 3797(a) (3).² Even though it should not come within the mutual savings bank exemption, this association would still not be subject to tax as a corporation unless it falls within the definition of association under this section.

The pertinent facts are not in dispute. Guaranty Employees Association was organized in 1939 for the exclusive benefit of employees of Guaranty Title & Trust Company of Corpus Christi, Texas. The latter company, hereinafter called Guaranty Title, is primarily a title insurance and trust company managing and investing in real estate in the Corpus Christi area. It had frequent requests from its employees for small loans, and it encouraged the creation of Guaranty Employees Association to take care of that need and further to encourage thrift, establish a savings plan among the employees, and to promote cooperation, loyalty, continuity of employment and better employer-employee relations in general.

On August 2, 1939, some 43 employees of Guaranty Title met in its offices and, without incorporating, adopted a constitution and by-laws for Guaranty Employees Association.

Membership is limited to employees of Guaranty Title and is represented by units of $50.00 each purchased only for cash.³ No more than fifty units can be purchased by any one person, that is the maximum deposit of any member is $2,500.00. The units are nontransferable. Passbooks are provided for to evidence deposits and withdrawals but with no checking privileges or transfer rights.

Each unit of deposit entitles the member to one vote at the annual meeting of the members. An employee leaving the employment of Guaranty Title must withdraw from the association, except that an employee who has been a member of the association for at least five consecutive years prior to retirement and who does not accept employment elsewhere may allow his or her investments to remain with the association so long as he or she lives and continues unemployed. Upon a member's death, the interest of any minor child may remain with the association until the child reaches legal age, and the surviving spouse may allow his or her interest to remain with the association during the remainder of his or her natural life.

General management and control of the business affairs of the association is lodged in an Executive Committee elected by the members at their annual meeting. No compensation is paid to the management and Guaranty Title furnishes office space rent free. Title to properties purchased is carried in the name of Guaranty Title as trustee, and the funds of the association are held likewise. Guaranty Title performs such ministerial duties as receiving money, paying money, handling membership accounts and distributing earnings, all for a commission of two per cent of the gross receipts.

At the end of each fiscal year, on March 31, the value of each unit is determined and fixed by the Executive Committee by adding thereto the unit's proportionate interest in the association's anticipated profits for the year, per the books. In the event of losses, all units share in such losses in proportion to their value as fixed by the Executive Committee. At the end of each fiscal year a reserve of five per cent of the year's net earnings is set aside for contingencies, with the unused portion of the prior year's reserve for contingencies being added back to the current year's net earnings for distribution to members. All earnings, after expenses, have been paid to the association's members.

The constitution provides that, "The Committee shall make loans, discount notes, purchase property, and invest funds, after the manner prescribed in the By-Laws of this Association." The by-laws provide that:

"The Executive Committee may purchase outright stocks, bonds, real estate, leases, or other things of value which, in the opinion of its members will constitute a sound and profitable investment upon unanimous vote of the Executive Committee. * * *

"From time to time it may be necessary for the Association to borrow money from the Banks for the purpose of purchasing investments. Since the Association as such will be unable to obtain such loans from the Banks it will be necessary that certain members of the Association as individuals obtain said loans and execute notes and obligations to the Bank for such loans. Where loans are authorized by the Executive Committee and are obtained in this manner for the benefit of the Association, it shall indemnify the person or individual members executing such notes, against any loss to the extent of its total assets."

Investment of the association's funds in real estate came about naturally. That was the type of investment with which the management and employees of Guaranty Title were most familiar. In 1943, the Executive Committee purchased a tract of land in what was then considered the remote south side of Corpus Christi, Texas, at a price of $300 per acre. The land was low and needed to be drained and the Committee felt that by draining it an immediate profit of $200 per acre could be obtained. In 1945, however, the association decided to subdivide this tract because of a change in conditions occurring since its acquisition due to the unusual growth enjoyed by Corpus Christi and the land's proximity to the Naval Air Station established immediately prior to and during World War II. Immediately after the war, when materials became available for residential construction, this land was subdivided and the lots were sold. In 1949, 1950, and 1951 the association acquired other residential business lots, some improved, others unimproved. In some cases improvements were added by the association. In some cases the acquisition was by purchase, others by foreclosure. These purchases were made in accordance with the practice of keeping the association's funds invested. During the tax years here in question no land was subdivided. The only tract ever subdivided is the one purchased in 1943 as raw acreage which had to be drained. The bulk of these lots were sold off prior to the tax years here involved.

After subdividing the tract purchased in 1943, the association filed federal income tax returns as an "association" taxable as a corporation. With respect to its fiscal years ended March 31, 1949, 1950, and 1951, for which such corporate taxes had been paid, the association filed claims for refund on the theory (1) that it was exempt as a "mutual savings bank," or (2) that it was not an "association" taxable as a corporation. These claims were disallowed by the Commissioner, and this suit for refund followed. The district court on cross-motions for summary judgment sustained the Commissioner's determination, holding that taxpayer was not exempt from federal income tax and was an "association" taxable as a corporation.

The plan of organization of Guaranty Employees Association had been suggested by an employee who had formerly worked for San Jacinto Trust Company and who furnished to the management of Guaranty Title copies of the constitution, by-laws, and deposit books used by the San Jacinto Employees Association. In turn, that association had been patterned after A-C Investment Association operated for the benefit of the employees of Anderson, Clayton Company of Houston, Texas. The Court of Appeals for the District of Columbia had, in 1933, held the A-C Investment Association exempt from federal income taxation as a "mutual savings bank" within the meaning of Section 231(2) of the Revenue Acts of 1921, c. 136, 42 Stat. 227; 1924, c. 234, 43 Stat. 253; and 1926, c. 27, 44 Stat. 9.

A circular to the members of the A-C Investment Association had 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." A-C Inv. Ass\'n v. Helvering, 62 App. D.C. 339, 68 F.2d 386, 387.

Its actual investments were indicated by its assets, thus stated in the opinion:

"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." A-C Inv. Ass\'n v. Helvering, supra, 68 F.2d at page 387.

Appellant urges that the laws of Texas do not regulate investments of mutual savings banks, that it meets the requirements of Treasury Regulation 111, Sec. 29.101(2),⁴ and that the Treasury Regulations are silent as to the type of investments which might or might not affect exemption as a mutual savings bank. Appellee points to O.D. 780, 4 Cum.Bull. 262 (1921), as the administrative enjoinder that an organization which receives its members' deposits and operates the fund for speculation cannot qualify as an exempt mutual savings bank. Appellant insists that its investments were not speculative, and the record may support that insistence. The evidence shows that...