BIR Ruling

November 20, 1972 2nd Indorsement Returned to the Regional Director, Revenue Region No. 13, Cebu City, the attached papers bearing on the internal revenue case of Cebu Mutual Building and Loan Association, involving the amount of P15,329.56 as 3% tax as lending investor for the period from September 1, 1969 to December 31, 1969 as demanded in a letter dated July 8, 1971 inviting attention to our letter of even date to the taxpayer which is self-explanatory. It appears upon investigation by that Office that the taxpayer is operating under Republic At No. 337 or the General Banking Act. Section 39 of said Republic Act provides: "SEC. 39. All corporations whose capital stock is required or is permitted to be paid in by the stockholders in regular, equal periodical payments and whose purpose is to accumulate the savings of its stockholders, to repay to said stockholders their accumulated savings and profits upon surrender of their shares, to encourage industry, frugality, and home building among its stockholders, and to loan its funds, and funds borrowed for the purpose, to stockholders on the security of unencumbered real estate and with the pledge of shares of the capital stock owned by such stockholders as collateral security, shall be known as building and loan associations, and the words "mutual building and loan association" shall form part of the name of every such association. It shall be unlawful for any building and loan association to make any loan upon property that is suitable for use only as theater, public hall, church, convent, school, club, hotel, garage, or other public building; Provided, however, That to facilitate the investment of the idle funds of a building and loan association, the Monetary Board may, in special instances, waive the provisions of this paragraph, in cases of public hall, school, hotel and other public buildings. With the approval of the Monetary Board, a building and loan association may also invest such of its funds as may otherwise remain idle, in bonds and obligations of the Republic of the Philippines, or of any of its political subdivisions, or of any government-owned or controlled corporation, including the Central Bank." "The fundamental characteristics of Building and Loan Association are: (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 for occasional borrowings to cover emergencies," they borrow no money and have no business other than the accumulation of money and 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. (Wilkinson v. C.C.A. Wis., 13 F. 2d 997, 998. cdt "Mutuality is the essential principle of a building and loan association. Its business is confined to its own members; its object being to raise a fund to loan among themselves, or such as may desire to avail themselves of the privilege. This is done by the payment at stated time of small sums in the way of dues, interest on loans, and premiums and loans. Each shareholder, whether a borrower or non-borrower participates alike in the earnings of the association, and alike assists in bearing the burden of losses sustained. It has what is called "a capital stock". This is only true in a modified sense. Unlike other corporation for profit, a share in a building association has at its inception only a nominal value. Its value is expected to increase by the lapse of time and the success of the association. Eversmann v. Schmitt, 41 N.E. 139, 1 141, 53 Ohio St. 174, 29 L.R.A. 184, 53 Am. St. Rep. 632. "Building and loan associations are a peculiar kind of corporation usually composed of aggregations of people dealing exclusively among themselves in accumulating a savings fund for investment in homes, more in the nature of a limited cooperative home building copartnerships rather than commercial bodies. Commonwealth vs. Home & Savings Fund Co. Bldg. Ass'n 106 S.W. 221, 222, 127 Ky. 537, 32 Ky. Law Reg. 435. (Words & Phrases, Vol. 5, Perm. Ed., 900-901; Emphasis ours) On the other hand, a lending investor includes all persons who make a practice of lending money for themselves or others at interest. (Sec. 194(u), Tax Code). From the foregoing, since building and loan associations are more in the nature of a limited co-operative rather than commercial bodies, they do not fall within the term "lending investors". In view of the foregoing and since the subject taxpayer has been found to be operating under the General Banking Act as a mutual savings and loan association lending money to its member stockholders, exclusive of the general public, it is the opinion of this Office that it is not liable for the payment of the amount of P15,329.56 as 3% lending investor's tax assessed against it. Accordingly, that Office should cancel the said assessment by accomplishing an Authority to Change Assessment. MISAEL P. VERA Commissioner of Internal Revenue