Summary
In Merchants Mechanics Federal Savings Loan Assn. of Springfield v. Evatt, Tax Commr., supra, this court held that funds placed as credits in a due-borrowers account were general deposits for a specific purpose and taxable as such. A check for the amount borrowed on each construction loan was issued to the borrower and endorsed back to the savings and loan association.
Summary of this case from First Central Trust Co. v. EvattOpinion
No. 28574
Decided July 16, 1941.
Taxation — Federal savings and loan association — Credits in due-borrowers account — General deposits for specific purpose and taxable, when.
Where a federal savings and loan association makes a loan secured by a construction mortgage and, after receiving back the check for the proceeds of the loan from the borrower properly endorsed by him, places the amount thereof to the credit of a due-borrowers account, for which a so-called breakdown is kept showing the various transactions with the amounts paid or payable to each borrower, the credits in the due-borrowers account are general deposits for a specific purpose and taxable as such.
APPEAL from the Board of Tax Appeals.
The cause comes into this court on appeal from a decision of the Board of Tax Appeals in which it was held that certain "due borrowers accounts," arising from construction loans made by appellant and amounting to $57,000, were correctly assessed by the Tax Commissioner for taxation as part of the deposits returnable by appellant "for the year 1939 and as of November 4, 1938."
The cause was heard by the Board of Tax Appeals upon the proceedings of the Tax Commissioner, an agreed statement of facts and additional evidence introduced at the hearing.
The following facts appear from the agreed statement and exhibits attached thereto and made part thereof:
Appellant is a federal savings and loan association duly incorporated, organized and existing under the laws of the United States of America, with its principal place of business in Springfield, Ohio. As a federal savings and loan association the appellant is required to keep its books, records and system of accounting according to the rules, regulations and requirements of the Federal Home Loan Bank, its department of examiners and other subsidiary departments at Washington, D.C.
On November 4, 1938, the Tax Commission of Ohio (then still in existence) issued an order fixing the time for listing for assessment taxable deposits in financial institutions transacting business in the state of Ohio as of the close of business on that date. At the same time the Tax Commission notified the appellant thereof in writing. Pursuant to such notice the appellant filed with the Tax Commission the required return of taxable deposits for taxation. This return discloses taxable deposits as follows: Gross deposits at the close of business on November 4, 1938, were $7,166,178.75, made up of the following items: Deposits, $35.12; running stock, $7,004,243.63; paid-up stock, $161,900. From the gross deposits were deductible non-taxable, withdrawable deposits totaling $432,025.16, leaving net taxable deposits of $6,734,153.59. Under liabilities, but not under deposits, appears the item "Due borrowers $57,002.22."
On May 12, 1939, which date was subsequent to the filing of such return, the Tax Commission sent a communication to appellant containing the "check sheet" showing a change in the taxable deposits, as they appeared in the original return, by adding to such deposits the item of "due borrowers $57,000" and another item with which this court is not now concerned and need not mention.
On June 10, 1939, the Tax Commissioner of Ohio (having assumed office) issued a certificate and notice of assessment to appellant, assessing a tax against appellant on such item of "due borrowers $57,000" in the increased sum of $114.
On June 29, 1939, appellant filed his petition on appeal protesting such additional assessment.
In addition to what has been summarized the agreed statement also contains the following:
"Said item of 'due borrowers $57,000' on the appellant's books consists of and arises as follows: When a loan is granted a borrower desiring to construct a building with funds to be loaned by the appellant and to be secured by a mortgage, to assure the preservations of its mortgage lien as a first and prior lien, appellant requires that the mortgage shall be executed by the mortgagee [ sic], filed and recorded in the office of the recorder of the county wherein the lands are situated. An account 'due borrowers' is then set up on the association's records as follows: (prior to the beginning of construction or the advance of any funds) The amount of such loan is due and payable to the mortgagee [ sic] only as the work progresses, and not in advance. The account of the borrower secured by such mortgage is charged with only such amounts and part of such debts, both for the purpose of interest and principal, as and when actually advanced and paid by the appellant. As installments of the loan are actually so paid and advanced they are, upon the account of the borrower and ledger of the appellant, charged and entered as a debt and amount due the appellant on its mortgage loan. If the mortgagor, for any reason, does not secure all, or any part of the proposed loan, such amount as is not paid to him is not charged to his account or carried on the books of the association as an asset, debit or credit, excepting as hereinafter set forth in the exhibit of a typical account showing the entire transaction as it is set up on the books of the association.
"For a clearer explanation of how the item or account of 'due borrowers' in such a transaction originates and is set up upon the association's books, the 'exhibit I' is hereto attached and made a part hereof and the items dated November 6 of 'cash, $5,000' in the assets column, and 'due borrower's [ sic], $5,000' in the liabilities column represents and sets forth the 'due borrower's [ sic] account of $57,000' which was assessed by the Tax Commissioner in this cause as a deposit.
"The mortgage and the mortgage debt are set up as a debit and credit in the asset and liability columns at the time of the execution of the mortgage, irrespective and irregardless [ sic] of when or if any amount may thereafter be paid or advanced to the mortgagor and consist only of the amount of the loan applied for, granted and the mortgage executed."
Exhibit I reads:
Assets Liabilities -------------------------------------------------------------------------- -------------------------------------------------------------------------- Debit Credit Debit Credit
Nov. 1 5,000.00 Cash Shares 5,000.00 --------------------------------------------------------------------------
Nov. 4 5,000.00 Mortgage Loans Due Borrowers 5,000.00
-------------------------------------------------------------------------- --------------------------------------------------------------------------(Statement Nov. 4) -------------------------------------------------------------------------- Nov. 4 10,000.00 Total Total 10,000.00 --------------------------------------------------------------------------
Nov. 5 5,000.00 Cash Due Borrowers
5,000.00 -------------------------------------------------------------------------- --------------------------------------------------------------------------(Statement Nov. 5) -------------------------------------------------------------------------- 5,000.00 Mortgage Loans Shares 5,000.00
-------------------------------------------------------------------------- --------------------------------------------------------------------------
For the most part the facts shown by the additional testimony taken are merely repetitions of what has been quoted from the agreed statement and are in no measure inconsistent with or contradictory of what was agreed upon. The facts shown by the testimony are undisputed and the material parts thereof, not already covered by the agreed statement, are in substance as follows:
In addition to the gross amount due borrowers shown on the ledger of the association there is a "breakdown" which enables one to tell the source from which the funds came and to know when the amount of a particular loan has been entirely paid out. This breakdown shows the specific transactions from which the total fund derived; but the exact form of that subsidiary record is not disclosed. At the time the construction loan is made and the promissory note secured by the construction mortgage is given, a check is issued to the borrower. He, having endorsed the check, immediately hands it back to the association and the proceeds go into the due-borrowers account. As the building progresses the money is paid out upon the order or approval of the borrower and he is charged in his loan account with the amounts so paid. These payments are made as the work progresses, the first installment of one-third when the house is enclosed and under roof, the second installment of one-third when the plastering is completed and the third and last installment of one-third when the building is completed. A form of the construction mortgage was offered in evidence which contains the provisions of the promissory note employed, from which it appears that the principal sum is payable "with interest from date at the rate of . . . . per centum (. . . .%) per annum on the unpaid balance until paid.
On July 14, 1939, the appellant forwarded to the Treasurer of the state of Ohio a check in the sum of $15,626.26, the amount certified to the state Treasurer by the Tax Commission of Ohio. That amount included the $114 in question. In the communication which accompanied the check, the appellant advised that it was making the payment under protest and asked that its receipt should be stamped "Paid under Protest" inasmuch as the appellant had filed its petition on appeal.
From the decision of the Board of Tax Appeals, in which it was found that the item of "due borrowers accounts," $57,000, was taxable as deposits, an appeal was taken to this court by Merchants Mechanics Federal Savings Loan Association of Springfield.
Messrs. Todd, Tehan Lorentz, for appellant.
Mr. Thomas J. Herbert, attorney general, and Mr. Perry L. Graham, for appellee.
The sole inquiry is whether the proceeds of construction-mortgage loans credited to borrowers in a general account on the books of a savings and loan association, as due borrowers (after checks for the proceeds of the respective loans have been endorsed by the mortgagors and turned back to the association) with no names of individual borrowers except as found in a breakdown showing specific transactions, constitute taxable deposits.
The method of making the loans, as shown by the agreed statement and the evidence may be simply stated: The borrower executes and delivers to the association his promissory note secured by a construction mortgage and in return receives the association's check for the full amount of the loan. Thereupon the borrower endorses the check and turns it back to the association. The amount of the check is then credited to the due-borrowers account and paid out by the association upon the order or approval of the borrower as the work of building progresses. The due-borrowers' account in the association's ledger does not show in detail the various transactions from which the fund derives, or the amount paid and payable on each piece of construction work or the names of the individual borrowers; but, as hereinbefore stated, a breakdown is kept which does so show.
Under the statutes of Ohio the taxable deposits of financial institutions are subject to a tax of two mills. Section 5638, General Code. The taxing authorities fix the day in November for which the deposits are to be returned by financial institutions of the state. After notice thereof is given and the return is made the taxing authorities assess the tax upon all deposits (except such as are exempted by law) in the name of the respective financial institutions as of the day so fixed. Sections 5324, 5328-1, 5406, 5411-1, 5411-2 and 5412, General Code. The several institutions may then pass on the charges to their respective depositors in the manner provided by statute. Section 5673-2, General Code.
Section 5328-1, General Code, provides: "All moneys, credits, investments, deposits, and other intangible property of persons residing in this state shall be subject to taxation, excepting as provided in this section or as otherwise provided or exempted in this title * * *." (Italics ours.) The remaining provisions of this section have no application here.
Section 5406, General Code, so far as it is applicable to the present case, provides: "The deposits required to be returned by financial institutions pursuant to this chapter include all deposits as defined by Section 5324 of the General Code to the extent that such deposits are made taxable by Section 5328-1 of the General Code, excepting deposits belonging to the federal government or any instrumentality thereof * * *." It should be observed in passing that the exception quoted has no reference to instances in which the federal instrumentality is depositee.
Section 5324, General Code, provides: "The term 'deposits' as so used, includes every deposit which the person owning, holding in trust, or having the beneficial interest therein is entitled to withdraw in money, whether on demand or not, and whether evidenced by commercial or checking account, certificate of deposit, savings account or certificates of running or other withdrawable stock, or otherwise, excepting (1) unearned premiums and surrender values under policies of insurance, and (2) such deposits in financial institutions outside of this state as yield annual income by way of interest or dividends in excess of four per centum of the principal sum so withdrawable."
State taxation is, of course, controlled in its final aspect by state law. The appellant, however, is a federal savings and loan association, organized under and by virtue of the provisions of Title 12, Section 1464, U.S. Code. Such an association can raise its capital only by payments on shares of stock as authorized in its charter. It is expressly provided in that section: "No deposits shall be accepted and no certificates of indebtedness shall be issued except for such borrowed money as may be authorized by regulations of the board." The appellant, nevertheless, had authority to lend money on construction mortgages and, in carrying out the transactions in connection with the loans and in setting aside funds in the due-borrowers account to the credit of borrowers, appellant was acting legally. Credits in that account were not "deposits" within the meaning of the federal statute; but that fact does not prevent such credits being "deposits" within the meaning of the state statute.
"Deposits" under the state statute include not only special deposits, general deposits and general deposits for a specific purpose but also stock deposits, that is, deposit liabilities of a financial institution on withdrawable stock whether running or paid up.
The appellant in making its return as required included all stock deposits as such but reported the credits held for borrowers under construction mortgages as a liability, namely, "due borrowers, $57,002.22."
Counsel for appellant contend that the action of the Board of Tax Appeals in approving the addition of the item of "due borrowers $57,000" (odd figures omitted) to deposits was unwarranted under the law and that the item is not a deposit.
In determining the rights of the parties mere matters of bookkeeping do not control. Nor is it of consequence that the federal authorities had prescribed a system of accounting which appellant was required to follow. It is the contractual relations of the parties that must govern, and methods of bookkeeping and entries made are of importance only for their bearing on what the contractual rights and obligations are.
If the due-borrowers credit was a taxable deposit at all, it must have been a special deposit, general deposit or general deposit for a specific purpose. A special deposit is one in which the money deposited is held in trust or bailment by the financial institution. A general deposit is one by which funds are left on deposit without specification or restriction as to use by the depositee or as to the purpose to which they may be put by or on behalf of the depositor. Such a deposit gives rise to the relationship of debtor and creditor. Fulton, Supt. of Banks, v. Escanaba Paper Co., 129 Ohio St. 90, 193 N.E. 758; Busher, Clerk, v. Fulton, Supt. of Banks, 128 Ohio St. 485, 191 N.E. 752. Money deposited for a definite purpose without any agreement or understanding that it shall not be used by the depositee for its own purposes is a general deposit for a specific purpose or, as it is sometimes called, a specific deposit and creates the relation of debtor and creditor just as in the case of a general deposit. Squire, Supt. of Banks, v. American Express Co., 131 Ohio St. 239, 249, 2 N.E.2d 766; Squire, Supt. of Banks, v. Oxenreiter, 130 Ohio St. 475, 200 N.E. 503. The credit in the due-borrowers account was certainly neither a general nor a special deposit. It is therefore necessary to inquire whether it was a general deposit for a specific purpose. If such, it is taxable.
The situation is akin to leaving money borrowed from a bank in an account in the same bank to the borrower's credit. It is a matter of common knowledge that a bank's customer often borrows money for which he gives his note to the bank and the bank in consideration thereof credits his bank account with the amount of the loan. This transaction creates a dual relation. By the giving of the note, the bank becomes creditor and the borrower debtor. As to the money deposited the bank becomes debtor and the borrower creditor. In that instance the deposit is general; yet it can not be said that the relations are different when the deposit is a general one for a specific purpose. In other words the analogy holds good when the customer borrows $100 on his note, and the bank places a credit of $100 in favor of the borrower in an account to be used only for a specific purpose but without an understanding that the money is not to be used in the business of the bank. It is not the use to which the credit is to be put that controls but the resulting creditor-debtor relationship which arises between depositor and depositee. As in the case of an ordinary general deposit, title to the funds passes to the bank and the depositor becomes a general creditor.
Here, too, is the same dual relation between the borrower and the association. The construction mortgage is a valid outstanding obligation from its inception. The mortgage must be returned as a part of the association's assets and considered in determining the book value of shares of invested capital upon which the association is taxable, regardless of the amount, if any, advanced from the due-borrowers account in payment for construction. If the promissory note, by which the mortgage indebtedness is evidenced, is to be regarded, interest runs from the date of the note on any unpaid balance whether the full amount of the principal or less. The fact that interest is not in practice charged to the borrower until the money is actually paid out can not change the nature of the contractual obligations by which the parties are bound. Likewise the amounts to the credit of that account in favor of the respective borrowers as shown by the breakdown are general deposits for a specific purpose and must be treated accordingly.
There is, however, another difficulty which is apparent rather than real.
Appellant being a federal savings and loan association was an instrumentality of the federal government. Under the "doctrine of federal supremacy" the assets, franchise and property of such an instrumentality can not be taxed without the assent of Congress. People v. Weaver, 100 U.S. 539, 543, 25 L.Ed., 705; Clement National Bank v. Vermont, 231 U.S. 120, 58 L. Ed., 147, 34 S.Ct., 31. There is, moreover, no federal statute which permits the state to tax deposits in a federal savings and loan association. If the tax were made the absolute liability of the association, a real difficulty would confront us. As the matter stands the association's liability is primary but not absolute.
The intent of the state statutes is to make the financial institution the collector of the tax on deposits. It must be borne in mind that a specific deposit (like a general deposit and unlike a special deposit) is a credit in favor of the depositor and a debt against the depositee. It is a mere chose in action. Evidently the Legislature meant to tax the credit at its source. So the tax is assessed in the name of the depositee and provision made for passing it on to the depositor. Thus it is the credit which is taxed and the creditor, that is, the depositor, is required ultimately to bear the burden. The fact that the depositee may elect not to pass the charge on, as is often the case, cannot affect the legal rights of the parties. By this method of taxation no burden is thrown upon the federal instrumentality in transgression of federal law. See Colorado Natl. Bank v. Bedford, 310 U.S. 41, 84 L.Ed., 1067, 60 S.Ct., 800.
Since the credits in the due-borrowers account are taxable as deposits, the decision of the Board of Tax Appeals is affirmed.
Decision affirmed.
WEYGANDT, C.J., TURNER, HART, ZIMMERMAN and BETTMAN, JJ., concur.
MATTHIAS, J., not participating.