210 F. 577 | 3rd Cir. | 1914
The -Park View Building & Loan Association was taxed under section 38 of the Act of August 5, 1909, c. 6, 36 Stat. 112 (Supplement of 1911 to Revised Statutes, p.
We do not think it necessary to rely on the rule that words imposing a tax should be clear; doubtful language being construed in favor of the -citizen. There is force in the government’s contention that the words in question do not impose a tax at all; that the tax is not laid by the proviso, but by the first clause of the section, which includes “every corporation,” etc.; and therefore that the court is asked to construe, not language that lays a tax, but language that exempts. The government insists that a different rule should be applied in such a situation, and that a doubt must be resolved against a claim of exemption. We lay the subject aside, however, for we do not think the questions presented are doubtful enough to require the aid of either rule.
' “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 meóme of toTUch inwes to the benefit of any private stockholder or individual.”
The government’s argument on this branch of the case is based upon the contention that the words in italics qualify the whole proviso, and apply to every organization or association named therein, including a building association like the plaintiff that issues what is known as prepaid stock. (This is not preferred stock, as will appear in a few moments.) We do not agree with this position. As*we construe the proviso, it excepts four groups of corporations:
“Labor, agricultural, or horticultural organizations.
“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.
“Domestic building and loan associations, organized and operated exclusively for the mutual benefit of their members.
“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.”
As pointed out in the association’s brief, section 2 of the Income Tax provisions of the Act of October 3, 1913, lends force to the construction that confines the italicized clause to the fourth group. Section 2 in clause S of the Act of 1913 repeals section 38 of the Act of 1909, the reason being that an earlier clause (G) is in effect a substitute for section 38, and that Congress did not intend to impose two taxes of the same nature at the same time, one by the Act of 1913, and the other by the Act of 1909. Being a substitute, therefore, clause G also contains an excepting proviso, and this as as follows:
“Provided, however, that nothing in this section shall apply to labor, agricultural, or horticultural organizations, or to mutual savings banks not having a capital stock represented by shares, or to fraternal beneficiary societies, orders, or associations operating under the lodge system or for the exclusive benefit of the members of a fraternity itself 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, nor to cemetery companies, organized and operated exclusively for the mutual benefit of their members, nor to any corporation or association organized and operated exclusively for religious, charitable, scientific, or educational purposes, no part of the net income of which inures to the benefit of any private stockholder or individual, nor to business leagues, nor to chambers of commerce or boards bf trade, not organized for profit or no part of the net income of which inures to the benefit of the private stockholder or individual; nor to any civic*580 league or organization not organized for profit, but operated exclusively for the .promotion of social welfare.” Act Oct. 3, 1913, c. 16, 38 Stat. 172.
We think it is clear that the repeated use here made by Congress of the negative clause — “no part of the net income of which inures to the benefit of any private stockholder or individual” — throws light upon the previous use of the same clause in the Act of 1909, and strengthens the construction we have adopted. We agree that the argument is somewhat weakened by the possibility of supposing that Congress was trying to make more clear in the Act of ' 1913 what may have been thought obscure in the Act of 1909; and we wish to avoid even the appearance of evading this consideration. But certainly both constructions are available, and one seems as likely to be correct as the other. We believe the view we have indicated should, be adopted.
But there is another reason for believing that the clause in italics could not have been intended to apply to the group of “domestic building and loan associations organized and operated exclusively for the mutual benefit of their members.” And the reason is this: Such application leads to a conclusion that may fairly be described as absurd. Every building, association is organized and operated for the mutual benefit of its members; this benefit is attained by profits; and profit is gained by the use of its funds — whether derived from installments, premiums, interest, or fines — supplemented by forfeitures; and by such dealing in real estate as it may be permitted or obliged to undertake. In every year of its normal operations it expects to have a net income, and of course this net income belongs, or inures, to its members. Now, while the members can hardly be described accurately as “private” stockholders (the word seems to be contrasted with some other relation to a particular association), they are certainly “individuals”; and therefore, if the right of a building association to. be exempted by the proviso is to be tested by the fact that no private stockholder or individual receives any benefit from its net income, the inevitable result will follow that the proviso has no effect upon building and loan associations at all, and that no such association can be exempted. We have said that in our opinion this conclusion comes near to absurdity, and we think that result is too plain to require further discussion.
“No such association shall issue preferred or other than common stock, and all shareholders shall occupy the same relative status as to debts and losses of the association; but nothing herein shall forbid agreements with shareholders who pay full par or maturity value of shares in advance, whereby they may waive participation in the general profits of the association in consideration of a fixed annual profit.” Act April 8, 1903 (P. L. p. 476, § 53).
The holders of the stock in question have waived their right to share with installment stock in the general profits of the association,
“ * * * That the rights of the two classes of stockholders are in all respects identical except as to the participation in the profits of the association as above set forth; that the profits of the Park View Building & Loan Association during the year 1909 and subsequent thereto have been in excess of 5 per cent, per annum.”
We think therefore the question may be properly stated in this form: Is the foregoing arrangement for the mutual benefit of the parties ? In our opinion the answer should be in the affirmative.
The subject of prepaid stock has been much discussed. Several courts have declared against it, and a few Legislatures have forbidden it, but the decided weight of authority, judicial and legislative, is in its favor. The course of the discussion is partially indicated in 4 Am. & Eng. Ency. (2d Ed.) 1030 (text and notes), and in 6 Cyc. 127 (text and notes); but a much better reference than either of these is Folk v. State Capitol, etc., Association, 214 Pa. 529, 63 Atl. 1013. In Folk’s Case, Judge Endlich, of the common pleas court of Berks county, discussed the subject elaborately and came to the conclusion (214 Pa. 535, 63 Atl. 1015) that there is authority of a very high and persuasive order for holding: ‘
, >■ * « That the acceptance of prepayment of stock and the issuance thereupon of full-paid dividend-bearing stock is in no proper sense a borrowing of money; * * * that, remembering that a building association cannot successfully perform its intended functions without members who are simply investors and not borrowers, its power to aid the latter class of members, and thus the main purpose of its creation, will be promoted by attracting investing members capable of putting larger sums at the society’s disposal than can be speedily gathered by means of periodical payments alone; that the allowance of a fixed dividend upon such paid-up stock out of the profits of the corporate business is a reasonable incident to its issuance, just to both classes of shareholders and not calculated to give either an undue advantage over the other; that, on the contrary, the practical effect of the concurrent issuance of both installment and full-paid stock is likely to prove beneficial to both classes of shareholders; that no essential characteristic of the building association scheme can be regarded as forbidding, and no essential purpose of it as defeated by, this device; that it is contrary to no accepted rule of policy applicable to or involved in the nature of building associations; and that (in Pennsylvania) it is not excluded by statutory provisions in terms authorizing and regulating operations on the footing of installment stock, but not clearly confining associations thereto or expressly prohibiting any other. And it is to be noted that with this view every adjudicated case Involving the point under discussion appears to be in harmony, except perhaps the one above referred to decided in North Carolina.”
And the Supreme Court of Pennsylvania, in the brief opinion approving and adopting Judge Endlich’s opinion, has this to say upon the subject (214 Pa. 543, 63 Atl. 1019):
“The general purpose of building associations is the accumulation of funds to.be loaned to their members and to be repaid in small periodical payments. The accumulation from the payment of installments on stock is so slow as often to hamper their practical operations, and different methods have been adopted to provide funds to meet the demands of borrowing members promptly*582 and thus to promote the general purpose. Building associations are authorized by the Act of June 25, 1895, P. L. 303, to borrow money for temporary use when applications for loans exceed the accumulations in the treasury, and when a series of §toel£ has matured. The issuing by these associations of full-paid stock to serve the same purpose as borrowing is an enlargement of their scope of operations not inconsistent with their original design, if properly restricted. While it has not been expressly authorized by the Legislature, there is a distinct recognition of the practice by the Act of June 22, 1897, P. L. 178, which subjects such stock to taxation. We find nothing unlawful in the issuing of full-paid stock, the dividends of which are not guaranteed but are limited in amount and payable only out of the profits, and the holders of which are entitled to no preference and have no advantage over other stockholders upon distribution in case of loss or insolvency; provided that the issue is incidental to the main business of the association and is intended to provide a fund from which loans may be made to the holders of installment stock. To this extent and for this purpose its issue is within the implied powers of such associations.”
Judge Endlich is the author of a standard treatise on building associations, and in sections 461-464 of the second edition he has again considered the subject and has stated the results of the prevailing principles to be as follows:
“464. The result of the principles declared and applied in these decisions would seem to be, in the absence of any statutory provision expressly authorizing or prohibiting it: (1) That building associations may always permit prepayments of stock subscriptions to be received, with or without rebate or interest allowance in consideration of such prepayment; (2) that, in pursuance of - charter provisions, such associations may issue paid-up stock with the incident of priority in distribution over installment stock; (3) that, under a like' power and the right to pay dividends, they may issue paid-up stock-bearing income at any given reasonable rate per annum payable in cash out of and to the extent of the earnings of the association; an arrangement on the part of any corporation to pay interest or dividends to its shareholders, without reference to the ability of the company to pay them out -of its earnings, being wholly illegal and void.”
We agree with these conclusions and with the reasoning that supports them, and we see no occasion to prolong the discussion. In our opinion, the members of the Park View Building & Loan Association are mutually benefited by the issue of the prepaid stock in question, and as a consequence the association is organized and operated exclusively for such benefit. It is certain that the association regards the arrangement as mutually beneficial, for it has availed itself of the statutory permission to adopt it; and we may be sure that the keen sense of self-interest possessed by the members of such associations would scarcely tolerate an arrangement — even if the statute did not expressly forbid it — that would constitute a.small class of privileged stockholders with rights superior to their fellows.
Looking at the subject from as many points of view as possible, we are persuaded that Congress intended the word “mutual” to mean “substantially equal,” and that a building association is organized and operated for the mutual benefit of its members when they share in the profits on substantially the same footing. Exact equality is probably not possible, where part of the stock is prepaid, and part is installment; but an approximate equality, sufficiently close for all purposes, is certainly not beyond the reach of calculation. We have no doubt
In brief, the Park View Building & Loan Association was “organized” exclusively for the mutual benefit of its members; the New Jersey Legislature required such benefit to be its object, and (as a means of attaining it) expressly permitted the use of prepaid stock. And the association is in fact “operated” for their mutual benefit, if we may trust the abundant and well-reasoned authority that approves of prepaid stock, and if we may rely also on the strong antecedent probability that the members would not agree to any arrangement that would disturb their substantially equal footing.
The judgment is affirmed.