Opinion
No. 3690.
June 2, 1926.
In Error to the District Court of the United States for the Eastern District of Wisconsin.
Action by the Mutual Building Savings Association against A.H. Wilkinson, Collector of Internal Revenue. Judgment for plaintiff ( 8 F.[2d] 183), and defendant brings error. Affirmed.
M.H. Adams, of Washington, D.C., for plaintiff in error.
Edwin J. Gross, of Milwaukee, Wis., for defendant in error.
Before ALSCHULER, PAGE, and ANDERSON, Circuit Judges.
The only question here is whether defendant in error, called plaintiff, a Wisconsin corporation, whose business is "the creation and care of a mutual savings fund for the payment to it by its members, and the making of loans to its members therefrom, upon real estate securities and upon such other securities as are authorized by the laws of the state of Wisconsin," should have been required, by plaintiff in error, called defendant, collector of internal revenue, to pay a stamp tax of only two cents per hundred, instead of five cents per hundred, on the instrument in the margin.
Milwaukee, Wisconsin, ____, 19__.
Received of the Mutual Building Savings Association, of Milwaukee, Wisconsin, ____ dollars, ($____), as a loan on ____ shares of class ____ installment (or full paid) stock in said association, evidenced by passbook and certificate number ____, which said shares of stock ____ hereby assign, transfer, and surrender to said association as collateral security, for the repayment of said money so loaned to and received by ____ from said association. ____ agree to pay monthly not less than ____ dollars, which shall be applied as follows: (This note is also secured by mortgage of even date.)
First. To the payment of interest due on said loan amounting to ____ dollars per month.
Second. To the payment of premium for precedence due on said loan amounting to ____ dollars per month.
Third. To the payment of any fines, or other charges against ____ in pursuance of the by-laws of said association.
Fourth. To the payment of the dues on said stock borrowed amounting to ____ dollars per month.
Said payments shall be continued until the dues so credited on said stock, together with the dividends declared thereon, shall equal the amount loaned.
Whenever ____ six months in arrears in the payment of any interest, premiums, fines, dues or any other charges then the whole amount of said loan shall at once become due and payable at the option of said association, and ____ said stock may without prior notice to ____ be applied at its then withdrawal value in liquidation of any claims said association may have against ____ hereunder or otherwise, and said association may at any time take judgment against ____ for any deficiency there may be.
This instrument shall be in every respect subject to the articles of incorporation, by-laws, rules and regulations of said association and lawful amendments thereto.
$_____. ______. [Seal.] ______. [Seal.] ______.
Plaintiff's contention is that the instrument is taxable under section 1107, subd. 5, tit. 11, schedule A, of the Act of 1921 (42 U.S. Stats. L. p. 305 [Comp. St. Ann. Supp. 1923, § 6318p]):
"5. Drafts or checks (payable otherwise than at sight or on demand) upon their acceptance or delivery within the United States whichever is prior, promissory notes, except bank notes issued for circulation, and for each renewal of the same, for a sum not exceeding $100, 2 cents; and for each additional $100, or fractional part thereof, 2 cents."
And the defendant contends that subdivision 1 of the act governs:
Sec. 1107, Subd. 1, Schedule Sec. 807, Subd. 1, Schedule A, Title XI, Act A, Title VIII, of 1921. Act of 1917.
"1. Bonds of indebtedness: "1. Bonds of indebtedness: On all bonds, debentures, Bonds, debentures, or certificates of or certificates of indebtedness indebtedness issued by issued on and after any person, and all instruments, the first day of December, however termed, nineteen hundred and issued by any corporation seventeen, by any person, with interest corporation, partnership, coupons or in registered or association, on each form, known generally as $100 of face value or fraction corporate securities, on thereof, 5 cents: each $100 of face value or Provided, That every renewal fraction thereof, 5 cents: of the foregoing Provided, that every renewal shall be taxed as a new of the foregoing issue: Provided further, shall be taxed as a new that when a bond conditioned issue: Provided, further, for the repayment that when a bond conditioned or payment of money is for the repayment given in a penal sum or payment of money is greater than the debt secured, given in a penal sum the tax shall be greater than the debt secured, based upon the amount the tax shall be secured." 40 U.S. Stats. based upon the amount L.p. 321 (Comp. St. § secured." 42 U.S. Stats. 6318h). L.p. 303.
Plaintiff was required to, and did, pay under subdivision 1. The court overruled a demurrer to its declaration, wherein was asked judgment for the difference between the two rates, and gave plaintiff judgment for that difference.
The Supreme Court, in United States v. Isham, 84 U.S. (17 Wall.) 496, 21 L. Ed. 728, laid down the rule:
"2d. The words of the statute are to be taken in the sense in which they will be understood by that public in which they are to take effect. * * *"
Following that rule, the meaning of subdivision 1 is quite clear. The act of 1917 makes no definitions. The act of 1921 does, and says, in part, that "person," as used in the act, "includes partnerships and corporations" — the word "person," as used in subdivision 1, must be read as though written "persons, partnerships or corporations," so that the words "all instruments, however termed, issued by any corporation with interest coupons or in registered form," are not to be read as the only words in the section relating to securities issued by corporations. The evident purpose of inserting those words was to cover all such instruments as ingenious persons might devise to take the place of, though not generally known as, "bonds, debentures or certificates of indebtedness." The words, "known generally as corporate securities," must be held, not only by reason of the subject-matter of the section, but also by reason of the punctuation, to refer to "bonds, debentures or certificates of indebtedness," as well as to those instruments specifically referred to as being issued by corporations. If those words had been intended to relate merely to words immediately preceding them, the comma between the the words "form" and "known" would have been omitted.
Again, instruments called "bonds, debentures or certificates of indebtedness" have always been the designating words for corporate securities, and until recently have been almost exclusively so used; we have not known that the word "debenture" has ever been otherwise used.
Subdivision 1 must have been intended by Congress to cover those instruments, not issued in the course of daily business, or in the course of business at all, but often outside the business of the individual or corporation issuing them, for the securing of long-time loans and for other purposes. Subdivision 5 covers the well-known time checks or drafts and certain promissory notes such as are customarily used in the ordinary affairs of the makers. A reasonable and legitimate dividing line seems to have been found and adopted.
What is the instrument in question?
We must take judicial notice of the Wisconsin law relating to building and loan associations. It is a matter of common knowledge that as to such associations there are certain fundamentals: (a) That their purpose always has been to enable persons of moderate means, by small monthly contributions, to become home builders and owners; (b) except occasional borrowings to cover emergencies, they borrow no money and have no business other than the accumulation of money from the sale of their shares, usually on monthly payments, to their members, and the lending of that money to their members, who wish to buy or build homes, so that the sole profit comes from the use, by the borrowing members, of the money paid in by all the members on their respective shares of stock.
The Wisconsin law as to loan associations provides that obligations for borrowed money shall be evidenced by a nonnegotiable note or bond, secured by a real estate mortgage. The instrument in question purports to be a receipt for a loan on the member's shares of stock in the association, and recites a transfer of those shares as collateral security. Then follow the various stipulations as to payments: (a) Interest; (b) premium for precedence; (c) fines or other charges under by-laws; (d) dues on stock. There are stipulations as to rights in case of six months' default, and the whole agreement is made subject to articles of incorporation, by-laws, rules, and regulations, and lawful amendments. Places for signature and seal are at the end.
Much stress is placed upon the fact that it is an instrument under seal. In our view of subdivision 1, that fact has little significance, unless it appears from the whole instrument that it is one known as a corporate security. We have not known of a corporate security that has not (1) negotiability; (2) a fixed or ascertainable time of full payment; and (3) a fixed sum to be repaid. The instrument here does not have any one of those things. It is not negotiable, nor is there any intent that it shall be negotiated. Its time of full payment is not fixed, except in case of default, nor can the time be ascertained from the instrument. The amount to be repaid is not known, nor can it be ascertained from the instrument. Both the amount to be repaid and the time when final full payment is to be accomplished depend, except in case of default, wholly upon the arrival of the time when the dividends from dues, fines, premiums, interest, etc., paid by all members, equal the loan or mature the borrower's stock. It is and is intended that it shall be an intermember and an intermember and society arrangement, to aid in effectuating the purposes of the organization, and hence is made subject to the charter, by-laws, rules, and regulations of the association, and even to the amendments thereof. What they are, or may be, is not disclosed in the instrument.
In section 1101, tit. 11, Stamp Taxes, Act of 1921 (42 U.S. Stats. L. p. 301 [Comp. St. Ann. Supp. 1923, § 6318j]), as items not to be taxed, are:
"Stocks and bonds issued by co-operative building and loan associations which are organized and operated exclusively for the benefit of their members and make loans only to their shareholders. * * *"
In the instrument, the shares are assigned as collateral security, and the substance of the thing done between the association and its members is not to repay the money advanced but to mature the stock from payment of dues, etc., until default, or until the stock value is at least equal to the advancements, and then the one is credited against the other. Interest on the whole sum advanced is paid to maturity. These matters are deducible from the provisions of the instrument, viz.:
"Said payments" (interest, etc.) "shall be continued until the dues so credited on said stock, together with the dividends declared thereon, shall equal the amount loaned."
We are satisfied this is not an instrument within the meaning of section 1, and that the transaction in question should not have been taxed thereby, and that the judgment for the demanded difference should stand.
The judgment is affirmed.