LABOR, AGRICULTURAL OR HORTICULTURAL ORGANIZATIONS. LAW. Section 231. .. (1) Labor, agricultural, or horticultural organizations; . . . . REGULATION. The organizations contemplated by paragraph (1) of section 231 as entitled to exemption from income taxation are those which (1) have no net income inuring to the benefit of any member; (2) are educational or instructive in character; and (3) have as their objects the betterment of the conditions of those engaged in such pursuits, the improvement of the grade of their products, and the development of a higher degree of efficiency in their respective occupations. Organizations such as county fairs and like associations of a quasi-public character, which are designed to encourage the development of better agricultural and horticultural products through a system of awards, and whose income from gate receipts, entry fees, and donations is used exclusively to meet the necessary expenses of upkeep and operation, are thus exempt. On the other hand, associations which have for their purpose, for example, the holding of periodical race meets, the profits from which may inure to the benefit of their shareholders, are not exempt. Similarly, corporations engaged in growing agricultural or horticultural products for profit are not exempt from tax under this paragraph. (Art. 512.) It has been specificially held that "a business activity organized for the purpose of affording employment to the members of a certain labor union, . . . . not part of the union as such, although owned and controlled by the union," paying wages to the members employed, and turning all profits, after paying expenses, into the treasury of the union, is not exempt.3 A corporation engaged solely in the publication of a paper containing no advertisements but only matter of interest to, and furthering the aims of organized labor, the expense of publication being borne by labor organizations is exempt.* MUTUAL SAVINGS BANKS. LAW. Section 231. ... (2) Mutual savings banks not having a capital stock represented by shares; REGULATION. In order that a corporation may be entitled to exemption as a mutual savings bank, it must appear that it is an organization (1) which has no capital stock represented by shares, and (2) whose earnings, less only the expenses of operation, are distributable wholly among the depositors. If it appears that the organization has shareholders who participate in the profits, the organization will not be exempt from income taxation under the statute. (Art. 513.) The United States Supreme Court has defined savings banks as follows: C. B. 2, page 211; O. D. 523. They (savings banks) are substantially institutions under public management, in pursuance of a great and beneficial public policy, organized for the purpose of investing the savings of small depositors. (National Bank v. Boston, 125 U. S. 60, 31 L. Ed. 689.) The Treasury, therefore, holds that a savings bank must be chartered by the Federal or State government and be operated under supervision of a governmental agency. For this reason employees' thrift clubs are held not to be exempt. 6 7 For a mutual savings bank to be exempt, the Treasury holds that the income must inure to the depositors and that no interest in the funds may be held by "trustees" or "members" 8 who are not depositors. In one ruling, it is held that the receiving of deposits under a contract to make future deposits takes a bank out of the exempt class. It is doubtful if this ruling, under all circumstances, correctly interprets the law. An earlier regulation 10 held that the establishment of an insurance department by an otherwise exempt Massachusetts savings bank does not destroy its exemption. FRATERNAL BENEFICIARY SOCIETIES. LAW. Section 231. . (3) Fraternal beneficiary societies, orders, or associations, (a) operating under the lodge system or for the exclusive benefit of the members of a fraternity itself operating under the lodge system; and (b) providing for the payment of life, sick, accident, or other benefits to the members of such society, order, or association or their dependents; . . . . REGULATION. A fraternal beneficiary society is exempt from tax only if operated under the "lodge system," or for the exclusive benefit of the members of a society so operating. "Operating under the lodge system" means carrying on its activities under a form of organization that comprises local branches, chartered by a parent organization and largely self-governing, called lodges, chapters, or the like. In order to be exempt it is also necessary that the society have an established system for the payment to its members or their dependents of life, sick, accident, or other benefits. (Art. 514.) III-37-1783; S. M. 2268. C. B. II-2, page 199; I. T. 1745. III-37-1783; S. M. 2268. 7 C. B. III-1, page 249; I. T. 1990. 528. C. B. 3, page 235; O. D. 703. C. B. III-1, page 250; I. T. 2027. C. B. 4, page 262; O. D. 780. 10 Regs. 45 and 62, Art. 513. C. B. III-1, page 248; S. M. 1697. See also C. B. 2, page 207; O. D. Until late in 1922, the Treasury interpreted this section of the law very narrowly.11 The following ruling indicates a more liberal view and one which, in the opinion of the author, is in closer harmony with the statute. RULING. . . . In conclusion, therefore, this office lays down the following for guidance in these matters: A fraternal beneficiary society, order, or association is exempt under the provisions of section 231 (3) of the Revenue Acts of 1918 and 1921 if it can be shown that (1) it is operated under the lodge system or for the exclusive benefit of the members of any society so operated, and (2) it has an established system for the payment to its members or their dependents of life, sick, accident or other benefits. "Operating under the lodge system" means carrying on its activities under a form of organization that comprises local branches, by whatever name known, chartered by the parent corporation and largely self-governing . . . Organizations are "operating" under the lodge system only when they have a parent and local organizations which are active. Mere provision in the constitution and by-laws for such bodies is not enough. It is not necessary that the fraternal feature of the organization should predominate. It is sufficient if both the fraternal and the benefit features are present. (C. B. 3, page 236, O. D. 690, overruled.) (C. B. I-2, page 180; I. T. 1516.) A mutual protective association organized under section 9427 of the General Code of Ohio is held not to be entitled to exemption as a fraternal beneficiary society.12 BUILDING AND LOAN ASSOCIATIONS. LAW. Section 231. (4) Domestic building and loan associations substantially all the business of which is confined to making loans to members;13 and cooperative banks without capital stock organized and operated for mutual purposes and without profit; . . . REGULATION. In general, a building and loan association entitled to exemption is one organized pursuant to the laws of any State, Territory, or the District of Columbia, which accumulates funds to be loaned primarily to its shareholders for the purpose of building or acquiring homes. In order to be exempt the association (1) must be mutual, that is, all of its shareholders or members must share in the profits on substantially the same footing; and (2) must be operated so that substantially all of its business is confined to the making of "See C. B. 3, page 236; O. D. 690; and C. B. 2, page 207; O. D. 508. 12 Commercial Travelers' Life & Accident Association v. Rodway, 235 Fed. 370. [Former Procedure] The phrase included in the 1921 and 1924 laws specifically applying this test to building and loan associations did not appear in the 1918 law. Under the 1909 law, it was held that making loans to and receiving deposits from non-members did not render building and loan companies taxable (Central Building, Loan & Savings Co. v. Bowland; Bellefontaine Bldg. & Loan Co. v. McMaken, 216 Fed. 526). loans to bona fide shareholders. A building and loan association otherwise exempt does not lose its exempt status because (1) It has paid-up shares which are (a) preferred as to earnings, and (b) have a definite rate of interest which may be higher than the rate of dividends paid on other stock. (2) It borrows money (accepting deposits is held to be a form of borrowing) which it uses for loans to shareholders, the dues, fines, and penalties paid by shareholders being inadequate for this purpose. (3) It makes loans to nonmembers from accumulated funds which are not needed for loans to shareholders. In any such case, however, the burden will be upon the association to show that substantially all of its loans are made to members. (4) The amount of its prepaid or full-paid stock is disproportionate to running or installment stock, provided the issuance of such prepaid or full-paid stock is ancillary to the furtherance of the main business of the association; that is, that it is intended to provide a fund from which loans may be made primarily to persons subscribing to running or installment stock to enable them to acquire or build homes. Cooperative banks without capital stock organized and operated for mutual purposes and without profit are exempt. Credit unions such as those organized under the laws of Massachusetts, being in substance and in fact the same as cooperative banks, are likewise exempt from tax. (Art. 515.) The fundamental purpose of building and loan associations is to make loans to members for the purpose of acquiring or building houses. The necessary funds, so far as possible, are derived from payments on instalment shares made by members. Sharing of profits on a mutual (not necessarily equal) basis by both borrowing and non-borrowing members is also required. To be exempt under the law substantially all the loans must be made to members. Even if the stockholdings of such borrowing members be nominal, the exemption may be allowed.14 The extent or character of membership is not prescribed by law, but is left to the discretion of the association.15 Subscription to nominal amounts of stock must be more advantageous to borrowers than full subscription, so that borrowers gain by crediting payments against loans rather than receiving dividends on stock.16 The use of payments to reduce principal of loan and thus reduce subsequent interest does not remove exemption.17 Where 97 per cent of loans were to 14 C. B. III-1, page 252; S. M. 1469. See also Acklin v. Peoples' Saving Assn., 293 Fed. 392. A proposed amendment to the 1921 15 C. B. III-1, page 266; S. M. 1705. Act that loans must be on the basis of stock holdings was rejected. non-members, exemption was denied.18 Loans must be made to non-members only when receipts from instalment stockholders are in excess of demand of borrowing stockholders.19 Retroactive stock subscriptions do not meet the requirements of the Act.20 Paid-up stock is an anomaly and if only kind issued, prevents exemption of association.21 Similarly, a disproportion between instalment stock and paid-up stock or fully paid investment certificates prevents exemption.22 Accepting deposits or borrowing from non-members is only permitted if necessary to provide funds for borrowing members.23 Borrowing and non-borrowing stockholders must share equally in profits.24 Exemption is denied if borrowing members receive no share in profits,25 or if one class of stockholders receives a return many times greater than that received by other classes.26 The rate of interest paid by borrowing members must not be exceeded by the rate of dividend paid to non-borrowing members and must be only slightly in excess of the rate of interest paid to depositors.27 The payment by borrowers of a small commission on loans does not destroy exemption.28 A building and loan association cannot be partially exempt.29 A cooperative bank meeting the requirements of a building, and loan association is entitled to exemption.30 An otherwise exempt association which engages in the insurance business loses its exemption.31 Dealing in real estate, except as incidental to foreclosure, prevents exemption.32 If loans are made largely on securities, automobile notes, etc., no exemption can be allowed.33 Exemption was not permitted where the loans, although secured by real estate mort 18 Lilley Building & Loan Co., v. Miller, 280 Fed. 143; affirmed 285 Fed. 1020; certiorari denied 262 U. S. 754, 67 L. Ed. 1216; 43 Supt. Ct. 702. (C. B. I-1, page 253; T. D. 3355.) I III-30-1687; S. M. 2225. See also III-43-1844; S. M. 2553. 20 III-34-1746; S. M. 2133. III-30-1687; S. M. 2225. C. B. 3, page 237; Sol. Op. 78. 22 C. B. 3, page 236; O. D. 573. III-30-1687; S. M. 2225. = "C. B. III-1, page 252; S. M. 1469. C. B. 3, page 238; O. D. 744. C. B. III-1, page 266; S. M. 1705. C. B. III-1, page 263; I. T. 1999. |