G.R. No. L-11861; April 1, 1918
EL HOGAR FILIPINO, plaintiff-appellee, vs. JAMES J. RAFFERTY, Collector of Internal Revenue, defendant-appellant.

FACTS:
El Hogar Filipino, a corporation organized under the provisions of Act No. 1459 (the Corporation Law) as a building and loan association, was assessed and compelled to pay income taxes for the years 1913 and 1914 by the Collector of Internal Revenue. The plaintiff paid the taxes under protest and filed an action for recovery, claiming exemption under the U.S. Act of Congress of October 3, 1913. This law exempted from income tax “domestic building and loan associations… organized and operated exclusively for the mutual benefit of their members.” The Collector of Internal Revenue contended that El Hogar Filipino was not entitled to the exemption because: (1) it issued different classes of stock (common, preferred, special), and (2) its by-laws provided for a fixed percentage of its dividends to be paid to its founder and his heirs, and to its board of directors. The lower court ruled in favor of El Hogar Filipino, declaring it exempt and ordering the refund of the taxes paid.

ISSUE:
Whether El Hogar Filipino is a “domestic building and loan association organized and operated exclusively for the mutual benefit of its members” and is therefore exempt from paying income tax under the Act of Congress of October 3, 1913.

RULING:
Yes. The Supreme Court affirmed the lower court’s decision, holding that El Hogar Filipino is a mutual building and loan association exempt from income tax.
1. On the issuance of different classes of stock: The Court ruled that the issuance of common, preferred, and special shares did not destroy the association’s mutuality. These different classes were issued to attract capital and create a loan fund for the benefit of the borrowing members, which is consistent with the purpose of building and loan associations. The primary objective remained the mutual benefit of the members in acquiring homes through accumulated savings and loans.
2. On the fixed charges for the founder and directors: The Court held that the agreement to pay a percentage of dividends to the founder (for his expertise in organizing the association) and to the board of directors did not negate mutuality. The law does not prohibit associations from compensating their officers, employees, or founders for valuable services rendered. Such payments, agreed upon by the members, are considered expenses for the benefit of the association and do not alter its fundamental mutual character.
Consequently, the Court ordered the refund of the income taxes collected from El Hogar Filipino.