tions themselves. Under the new law all "domestic" building and loan associations are exempt from the income tax.

In order to avoid future complications and possible penalties, however, it is declared that the wisest course to pursue will be for each building and loan association to file with the Internal Revenue Collector a formal claim to exemption, setting forth that it is such a "domestic" building and loan association as is mentioned in the law and therefore not subject to the income tax. The exemption claims filed by some of the building and loan associations in connection with the corporation tax under the law of several years ago will not cover the requirements of the present law.

Building Associations Exempt.

U. S. Circuit Court of Appeals Affirms the Decision of the Lower Court in the Parkview Case.-A Decisive Victory

for the Associations.

The Circuit Court of Appeals for the Third Circuit, at Philadelphia, has affirmed the decision of the lower court exempting building and loan associations from the operation of the Corporation Excise Tax, holding that associations which issue prepaid stock do not thereby destroy their mutuality and are entitled to exemption as building and loan associations operated exclusively for the mutual benefit of their members. The decision in full is promulgated by the Internal Revenue Department as a Treasury Decision, as follows:

(T. D. 1941.)

Corporation tax.-Building and loan associations.--Decision of court.

1. CONSTRUCTION OF CLAUSE.

The words "no part of the net income of which inures to the benefit of any private stockholder or individual" do not apply to domestic building and loan associations operated for the mutual benefit of members.

2. EXEMPTION.

Building and loan associations operated exclusively for the mutual benefit of their members are exempt.

3. ISSUANCE OF PREPAID STOCK.

The issuance of prepaid stock does not destroy mutuality (affirming 203 Fed., 876).

TREASURY Department,

OFFICE OF COMMISSIONER OF Internal Revenue,

Washington, D. C., January 31, 1914.

The appended decision of the United States Circuit Court of Appeals for the Third Circuit, in the case of Herold, Collector of Internal Revenue, vs. Park View Building and Loan Association, is published for the information of internal revenue officers and others concerned. W. H. OSBORN,

Commissioner of Internal Revenue.

United States Circuit Court of Appeals for the Third District. October term, 1913. No. 1801.

Herman C. H. Herold, Collector, vs. Park View Building and Loan Association.

Error to the District Court of the United States for the District of New Jersey.

Before Gray, Buffington and McPherson, Circuit Judges.

MCPHERSON, Circuit Judge: The Park View Building and Loan Association was taxed under Section 38 of the Act of August 5, 1908 (Supplement of 1911 to Revised Statutes, p. 946), and was compelled to pay $71.04 tax and penalty for the year 1909. This suit, which seeks to recover that sum from the collector, was removed from a state court of New Jersey to the District Court, where the parties agreed upon a statement of facts. The court entered judgment for the association (203 Fed. 876)-Judge Orr presiding specially-and we refer to his opinion with general approval. On two or three branches of the subject, something more may perhaps be said without extending the discussion unduly.

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," &c.; 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 thing the questions presented are doubtful enough to require the aid of either rule.

Let us consider first the question Judge Orr did not decide, namely: what effect should be given to the words hereafter italicized in the proviso to the first paragraph of Section 58. After imposing a special excise tax upon "every corporation, joint stock company, or association, organized for profit and having a capital stock represented by shares," &c., the paragraph proceeds to state certain exceptions to the generality of this clause:

"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."

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."

The character of the first three groups is well known. In none of them (as normally conducted) does the net income inure to the benefit of private stockholders or individuals, and it would have been superfluous to add that feature to the description. But there is a large and a more indeterminate class—“religious, charitable, and educational" corporations or associations and this class contains some members whose precise character may not be altogether easy to define. For example, a church is no doubt organized and operated exclusively for religious purposes; but is this true of a campmeeting association also? Such an association sometimes has net income that inures at least in part to the benefit of private stockholders or individuals. A hospital is usually organized and operated exclusively for charitable purposes; but there are private hospitals operated by associations, whose net income goes to the benefit of individuals. The exclusive purpose of a school is educational; but the income of many schools operated by associations is devoted to private profit. Indeed, everyone acquainted with the problems of state taxations knows how often the courts have been called on to determine the scope and application of statutes exempting charitable and educational institutions from taxation; and we see no reason to doubt that Congress intended to avoid such disputes as far as possible by establishing both a positive and a negative test for the restricted membership in the 4th group. Positively, (as the use of the word "exclusively" makes this test partly negative also) the test is, that the corporations and associations must be organized and operated exclusively for religious, charitable and educational purposes; and negatively, the test is that none of such corporations and associations shall devote its net income, in whole or in part, to the benefit of any private stockholder or individual.

As pointed out in the association's brief, Section 2 of the Income Tax provision of the Act of October 3, 1913, lends force to the construction that confines the italicized clause to the 4th group. Section 2 in clause B 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 is 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 of 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 league or organization not organized for profit, but operated exclusively for the promotion of social welfare." 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 finessupplemented by forfeitures, and by such dealings 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 "individual"; 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..

But the chief contention of the government is that the associaion is not organized and operated exclusively for the mutual benefit of its members, and the sole support of the argument is found in the fact that the association issues prepaid stock. We repeat that this is not preferred stock. The New Jersey statute forbids the issue of such stock, namely, stock whose holders enjoy advantages greater than the holders of the common stockwhile the issue of common stock that is prepaid is expressly authorized:

"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."

The holders of the stock in question have waived their right to share with installment stock in the general profits of the association, and they have agreed to accept in lieu thereof (but only "out of the profits of the associa

tion") 5 per cent yearly on the amount prepaid. This is the only difference between the prepaid stock and the installment stock; the parties have stipulated

.. 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 and 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 formIs 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 vs. State Capital, etc., Association, 214 Penna., 529. In Folk's case, Judge Endlich, of the common pleas court of Berks County, discussed the subject elaborately and came to the conclusion (p. 535) that there is authority of a very high and persuasive order for holding

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that the acceptance of prepayment of stock and the issuance thereupon of full paid dividend bearing stock is in no proper sence 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 associations 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 (p. 543):

"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 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 application for loans exceed the accumulations in the treasury, and when a series of stock 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