because that country did not satisfy the exempt tax (Sec. 213 (b) (8), I. T. 1485).

Servants of a diplomatic representative of a foreign country should not be examined for income tax purposes when leaving if accompanied by the representative (O. D. 812). Income derived by a family of a foreign diplomatic officer or by himself from investment was exempt (O. D. 1115); this was also true of the funds of foreign legations (O. D. 710), ministers, ambassadors or others representing foreign countries or their staffs (O. D. 336). But residents of the United States (O. D. 196) or alien employees (I. T. 1472) rendering service to them were taxed on their compensation received. Delegates to the United States, representing a foreign government, in connection with an agreement with the Food Administration exchanged raw materials for flour. They were not subject to tax on any profits thus derived (O. D. 182). Fees received by a foreign consul as administrator of the estate of a countryman by appointment of a domestic court were not consular fees and not exempt from tax (I. T. 1259).

XXIX

ORGANIZATIONS SUBJECT TO THE CORPORATE TAX-CONSOLIDATED RETURNS

Powers of a corporation determine its exemption. Agricultural and horticultural organizations, mutual savings banks, fraternal beneficiary organizations, building and loan associations, cemetery companies, community chests, funds and foundations for religious, charitable, scientific, literary, and educational purposes. Business leagues, civic leagues, and social clubs. Mutual insurance companies, cooperative associations. Insurance companies divided into three groups for tax purposes. Requirements for consolidated returns. Retroactive provision of 1921 act.

CERTAIN Corporations, enumerated in Section 231, are exempt from income taxes. They possess a characteristic in common of being organized for some purpose other than that of making profits and paying dividends to private stockholders or other individuals. Recent acts have clarified in certain cases the status of particular corporations, the principal addition to the exemptions being community chests, funds, foundations, and the like, devoted to "religious, charitable, scientific, literary or educational purposes,” employees' associations, and local benevolent life insurance and other local insurance companies, provided not less than 85% of the income proceeds from members. Proof of exemption must be furnished the local collector by every exempt corporation as outlined in Article 511.

The character of a corporation must be judged by its articles of incorporation, constitution, and by-laws rather than the declaration of its officers or by the methods under which it conducts, or has conducted, its business. Accordingly, if the activities of a corporation are confined to cooperative selling for the benefit of its patrons, but is granted additional powers by its charter, it will nevertheless be required to file a return and pay taxes (O. D. 190). An organization which otherwise would be exempt from taxation is not exempt if it operates in a non-exempt

manner, owns property in excess of its needs, or carries on industrial pursuits distinct from its exempt activities (O. D. 953). This attitude of the Treasury Department contrasts with that of the Courts. In U. S. v. Emery-Bird (237 U. S. 28), Justice Holmes stated: "The question is rather what the corporation is doing than what it could do."

(a) Labor, agricultural, and horticultural organizations do not include those organized for profit, but do include such organizations as county fairs. They must have educational objectives and the betterment of conditions of members as a purpose. Labor unions are exempt (Art. 512).

Agricultural corporations organized under authority of Montana laws are taxable (I. T. 1194), as was also a corporation owned by a labor union, organized for the purpose of securing employment for members (O. D. 523). Breed register associations were not exempt agricultural corporations (A. R. M. 79). A labor paper, carrying no advertisements, was exempt (S. M. 2558).

(b) Mutual savings banks are exempt, provided they have no capital stock represented by shares and distribute the earnings among depositors (Art. 513). Federal land banks and national farm-loan associations are also exempt (Sec. 231 (14)).

A savings fund association having no capital stock, deriving its income from investments of deposits, dividing the income pro rata among its depositors, and electing its board of directors from the members who are depositors, is exempt (O. D. 528). A reasonable surplus may be accumulated (I. T. 1990); but if members do not participate in the reserve fund in the case of dissolution, the bank is not exempt (I. T. 2027). Loans to nonmembers, in certain years, as high as 122%, did not bar exemption (S. M. 2553). Likewise, an organization whose stock was represented by certificates of deposit was also exempt (O. D. 703). But where the members are under compulsion, by contract, to make future deposits and the organization had speculative aspects, it did not belong in the tax-exempt group (O. D. 780). A mutual savings bank was held not to exist in the case of a corporation operating a fund for employees to which bonuses would be credited, having earnings of its own, and subject to withdrawal only if the employee left the business (I. T. 1745), or in the case of a savings club organized by employees (S. M. 1697, 2268) or

an investment company making investments for members (I. T. 2207). A cooperative bank having the characteristics of a building and loan association is exempt (I. T. 1967).

(c) Fraternal beneficiary organizations operating under the lodge system and having an established system of benefits for members are exempt (Art. 514).

Not one but both of the above requirements must be present, although it is not necessary that either predominate (I. T. 1516). The term "fraternal" properly can be applied where the pursuit of a common object usually has a tendency to create a brotherly feeling among members. The absence of profit is not the criterion, but the lack of a fraternal object may make the organization a taxable one (O. D. 690). Even though both fraternal and benevolent features may be present, other activities may bar the organization from the exempt class (O. D. 508).

(d) A building and loan association (1) must be mutual in character and (2) substantially all of its business must be confined to making loans to members. Various features permissible under this type of tax-free organization are outlined in Article 515.

The ratio of the prepaid stock and running stock was held to be immaterial, provided the stock was incidental to the main business and even where borrowings were made without reference to subscriptions to stock (S. M. 1705). But borrowing members nust share in remaining profits (I. T. 1979, 1992, 1999). Where a commission of 1% in lieu of membership was charged, the status was not changed (O. D. 744); however, the chief operations must be confined to making loans on homes. No sides-lines were permissible (Sol. 78, O. D. 768, 1088, 1129; I. T. 1961, 2283; S. M. 5231). A building and loan association whose paid-in capital and investment certificates paid up exceed the running shares and investments could not be considered to come within the meaning of the law as a building and loan association (O. D. 573). Unless a building and loan association has some feature which makes it taxable it was not subject to tax (S. 1140). The most essential characteristic of a building and loan association was mutuality. The making or receiving of loans from non-members did not change the status if merely incidental (Lilley Building and Loan Co. v. Miller, 262 U. S., 754; T. D. 3355; Ct. D. 27; S. M. 2225). A building and loan association cannot be partially

exempt and partly taxable (I. T. 1991). Joint-stock land banks were not exempt (Sol. Op. 68).

(e) A cemetery company must be operated for its members or lot-owners only and not for profit (Art. 516).

Where no dividends could be paid or surplus accumulated, the cemetery corporation was exempt; the operation must be exclusively for lot-owners (S. 991; Sol. Op. 120). If the stock is owned by any person other than a lot-holder, the corporation is not exempt (I. T. 1541). Amounts received for the upkeep of lots, unless to be held in trust for the donors, are taxable income (S. M. 1591; 2 B. T. A. 495; 4 B. T. A. 903).

(f) Community chests, funds, and foundations for religious, charitable, scientific, literary, or educational corporations, as well as those corporations themselves, compose, perhaps, the largest group of tax-exempt corporations. It is to this group that most of the deductible contributions permitted individuals may be made. Educational institutions are held not to include organizations formed for the purpose of spreading controversial or partisan propaganda. The carrying on of profit-making side-lines, if incidental, does not destroy exemption. The same reasoning applies to a charitable organization where provision is made that holders of voting shares, although not entitled to income during the life of the organization, are, nevertheless, the recipients of both principal and accumulated income in case of dissolution (Art. 517).

Exempt educational corporations have included a student loan fund (O. D. 1102); a league devoted to the bringing about of a "fair and open-minded consideration of social, industrial, political, and international questions" among college students (I. T. 1224); a corporation whose purpose was to foster good music and promote the musical art (I. T. 1475) or educate the public through concerts (S. 1176); and an association formed to prevent the employment of children in dangerous occupations (O. D. 705). A religious order whose income is derived from rents, dividends, and interest and is used in carrying on its work is exempt (Trinidad v. Sagrada, 263 U. S., 578; 4 B. T. A. 61; T. D. 3548). But the exemption apparently does not include communistic religious organizations selling the products of mem