Lilley Bldg. & Loan Co. v. Miller

• Decision Date: 12 April 1922
• Docket Number: 2105.
• Citation: 280 F. 143
• Parties: LILLEY BUILDING & LOAN CO. v. MILLER, Collector of Internal Revenue.
• Court: U.S. District Court — Southern District of Ohio

280 F. 143

LILLEY BUILDING & LOAN CO. v. MILLER, Collector of Internal Revenue.

No. 2105.

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

April 12, 1922

Andrew J. Hess, of Sidney, Ohio, Thomas L. Pogue, of Cincinnati Ohio, and Oscar W. Newman, of Columbus, Ohio, for plaintiff.

James R. Clark, U.S. Atty., of Cincinnati, Ohio, and William J Ford, Asst. U.S. Atty., of Columbus, Ohio, for defendant.

PECK District Judge.

Action to recover corporate income taxes paid under protest for the years 1918, 1919, and 1920, under the Revenue Act of 1918. 40 Stat. 1057 (Comp. St. Ann. Supp. 1919, Sec. 6336 1/8a et seq.). Submitted on the evidence, without jury. The essential question is whether the plaintiff was exempt from the tax.

Section 231(4) exempts 'domestic building and loan associations and co-operative banks without capital stock, organized and operated for mutual purposes and without profit. ' Comp St. Ann. Supp. 1919, Sec. 6336 1/8o. It is claimed by the government that the plaintiff does a banking business under the guise of a building association; by the defendant, that its activities are no broader than those permitted to be exercised by such associations organized under the laws of Ohio. General Code of Ohio, Sec. 9643 et seq.

The facts are not in dispute. Plaintiff does not hold meetings at stated intervals, as such associations frequently do, but keeps its place of business open during the usual business hours of the day. It receives deposits from nonmembers, evidenced by entries in books such as are ordinarily used by savings banks. Withdrawals may be made on presentation of books. On these accounts (which constitute the bulk of its business) it pays interest at the stated rate of 4 per cent. It also receives time deposits, for which it issues certificates bearing interest at the rate of 5 per cent. It has paid-up stock; also 'running stock' on which installment payments are made. Both classes of stock receive semiannual dividends at the rate of 5 per cent. per annum.

Its statement for the year 1920, which may be taken as typical of the period of time involved, shows running stock of $121,000, paid-up stock of $123,000, deposits of $830,000, borrowed money $20,000, and a reserve fund of $18,500 (odd figures are omitted). Its stockholders numbered 301; its borrowers 495 of whom but 2 were stockholders; and its savings depositors were 2,239. Its loans were all made upon homes, the average amount of each being about $3,500. It had no checking accounts. A depositor, wishing to make a withdrawal, presented his passbook and for the amount was given a check to his own order, which he indorsed and returned to the association, receiving thereon the cash. The association then put the check through its bank. Its mortgage loans were usually payable in monthly installments. The few loans made to members took the same course as those to nonmembers. The borrowing members gave their notes and paid them off in installments, such obligations being entirely disassociated from their obligations to pay for stock. The ordinary building association method of subscribing for stock to the amount of the loan, the stock, when paid up, extinguishing the loan, was not pursued.

It will be observed that about 80 per cent. of its receipts and 97 per cent. of its loans are transactions with nonmembers. Thus by far the greater number of those with whom it does business have no interest in its profits, and as long as it remains solvent, they have none in its losses. The earnings accrue to the stockholders. Mutuality of interest between the stockholders, on the one hand, and the depositors and borrowers, on the other, is lacking.

This course of business seems to be within its charter powers as prescribed by the statutes of Ohio, particularly sections 9648 and 9657, General Code of Ohio. It does not, however, conform to the general conception of the functions of such an association.

'Mutuality is the essential principle of a building association. Its business is confined to its own members; its object being to raise a fund to be loaned among themselves, or such as may desire to avail themselves of the privilege. ' Eversmann v. Schmitt, 53 Ohio St. 175, 184, 41 N.E. 139, 141 (29 L.R.A. 184, 53 Am.St.Rep. 632).

'The leading feature of such an association is that its members are kept upon a strictly co-operative basis, with mutual advantages and benefits, sharing alike in the profits and sustaining their proportionate share of the losses. ' 4 R.C.L., 'building and Loan Associations,' p. 344.

In Halsell v. Merchants' Insurance Co., 105 Miss. 268, 62 So. 235, 645, Ann. Cas. 1916E, 229, a concern organized under the Building Association Act of the state of Mississippi, with powers similar to those exercised by the plaintiff, was held not to be such an association in the real meaning of the term. Having regard, therefore, to its general character, as distinguished from its mere charter powers, there is no doubt that the business conducted was in the main not that of a building association as ordinarily conceived.

Plaintiff's counsel, however, contend that the definition adopted by the statutes of Ohio of the term 'building association,' and not that of general usage, is controlling. But it must be remarked that the statutes referred to do not attempt to define a 'building association,' as distinguished from a 'savings association':

'A corporation for the

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