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Charter and By-laws and an affidavit executed by its principal officer showing the disposition made of such income as it receives and stating specifically whether or not any of the income so received inures to the benefit of any individual stockholder. The question of whether or not the organization will be held to be exempt is determined by the Treasury Department upon the facts so shown.3
Exemption Limited to Classes Specifically Enumerated. Any corporation, no matter how created or organized, or what the purposes of its organization may be, is taxable unless it comes within the classes of organizations specifically enumerated as exempt. A corporation is not exempt simply and only because it is primarily not organized and operated for profit. If income within the meaning of the law arises and accrues to a corporation, such income will be subject to the tax unless it is one of the exempt organizations expressly enumerated in Section 11. Thus, commercial men's associations, and like organizations are not exempt, as they are not expressly enumerated, although they may be corporations not organized for profit.4
Where Question as to Right of Exemption Exists. Where there is any doubt as to the status of a corporation under the provisions of the law, and its exempt status has not been established by the Treasury Department, the annual return should be filed (in blank if
3 Letter from Treasury Department dated December 6, 1916; I. T. S. 1917, 11134.
4 Reg. 33, Art. 80; T. D. 2152. This Treasury decision also held farmers' mutual fire insurance companies to be taxable, but the 1916 Law subsequently expressly exempted such organizations
desired) and an affidavit attached thereto setting out fully the nature and purpose of the organization, the source of its income and what disposition is made of it and particularly of any surplus.5
Right of Exemption Must Be Proved on Request. Corporations enumerated as exempt may at the request of the Collector or Commissioner of Internal Revenue, be required to establish their right by showing the character and purpose of the organization, the manner of distributing the net income, if any, or that none of the net income inures to the benefit of any private stockholder or individual. In the absence of such a showing such organizations may at any time be required to make returns of annual net income or disclose their books of account to a revenue officer for examination in order that the status of the company may be determined. Having once satisfied the collector as to its right to exemption a corporation is not required to make any further showing in subsequent years unless the collector has reason to believe that the status of the organization has changed, or that its net income is inuring to the benefit of the stockholders or members.?
Labor, Agricultural and Horticultural Organizations (first class). Although the law exempts these organizations without any qualification, the exemption is undoubtedly intended to apply only to such organizations as are not organized for profit but are organized for the mutual welfare of their members. Thus agricultural corporations owing sugar plantations and disposing of the product thereof have been held by the Treasury Department to be organized for profit and not entitled to exemption as agricultural organizations under this provision.8 County fairs or like organizations not themselves engaged in agricultural or horticultural pursuits, but which, by means of awards, premiums, etc., are intended to encourage better production, and no part of whose income inures to the benefit of any private stockholder or individual, are held to be exempt.
5 Reg. 33, Art. 91; Letter from Treasury Department dated November 1, 1916; I. T. S. 1917, 1 1133.
6 Reg. 33, Art. 88.
Mutual Savings Banks (second class). The mutual savings banks which are exempt are those not having a capital stock represented by shares. As to what constitutes a mutual purpose see the discussion in the paragraph on building and loan associations below.
Fraternal Beneficiary Societies (third class). Fraternal beneficiary societies, orders or associations are exempt if they operate under the lodge system or if they are for the exclusive benefit of the members of a fraternity itself operating under the lodge system, and if they provide for the payment of life, sick, accident, or other benefits to the members of such society, order or association or their dependents. One important characteristic of this class of exempt corporations is that they must operate under the lodge system or be for the exclusive benefit of a society operating under such system. Such a society or organization is considered to be one organized under a charter, with properly appointed or elected officers, with an adopted ritual or ceremonial, holding meetings at stated intervals, and supported by fees, dues or assessments.10 Mutual protective associations, not operating under a lodge system are not exempt under this provision since they lack one of the characteristics of this class 11
8 T. D. 2090. 9 T. D. 1737,
Domestic Building and Loan Associations and Cooperative Banks 12 (fourth class). A domestic building and loan association is held to be one organized under the laws of the United States or of a state or territory or under the laws applicable to Alaska or the District of Columbia. Mutuality in operation and in the distribution of profits and benefits is essential to exemption In order to come within the exempted class such associations must not only be domestic but they must be without capital stock and be organized and operated exclusively for mutual purposes and without profit; that is, all the profits and benefits provided for in the articles of association and by-laws must be ratably distributed among all the members, regardless of the kind of stock held, according to the amount of money they have on deposit. An association issuing different classes of stock upon which different rates of interest or dividends are guaranteed or paid is not in the exempt class.18 Under the 1909 Law it was decided that a building and loan association was exempt although it issued both prepaid and instalment stock, but that one issuing preferred stock was not exempt.14 Mutual benefit does not necessarily mean equal benefit. A building and loan 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 instalment, but an approximate equality sufficiently close for all purposes is certainly not beyond the reach of calculation. 15 Building and loan associations are not exempt if they loan money to others than their members, thus doing business similar to that engaged in by banks or trust companies. Building and loan associations which receive sums of money on deposit which is not payment of stock, and on which the depositor receives a fixed rate of interest, regardless of the earnings of
10 Reg. 33, Art. 89.
11 Commercial Travelers Life and Accident Association v. Rodway, 235 Fed. 370. This case contains an extended discussion on the distinction between a mutual association and a fraternal association.
12 Co-operative banks were included by the 1916 Law.
15 Herold v. Parkview Building and Loan Association, 210 Fed. 577. The association issued two varieties of stock, one known as prepaid stock on which the full par value of $200 per share was paid by the holder at the time of the issuance of the stock, and upon which the Company paid to the holder out of the profits of the association the sum of 5% per annum in lieu of participation by said stockholder in the general profits of the association, and a second stock known as instalment stock whereon the holder paid one dollar per share per month and to which was added the proportionate share of the profits of the association after deducting expenses until the aggregate of payments and profits equaled the sum of $200, when the said sum was paid to the holder and the shares retired. The prepaid stock could be cancelled by the corporation at any time upon thirty days' notice and payment of the value thereof together with interest at the rate of 5% from the date of last payment of interest, and each holder of such stock could likewise upon thirty days' notice tender his certificate and require payment from the association. The association bor. rowed no money from individuals whether members or members, loaned no money to persons other than members of the association, but borrowed according to its business demands from a local bank. The association was organized under the Act of April 8, 1903 (Public Laws, p. 457) of New Jersey.