1980 U.S. Tax Ct. LEXIS 29">*29
A building and loan association paid or credited a bonus distribution to depositors or to the accounts of depositors on Sept. 30, 1972. At the close of business on Sept. 30, 1972, pursuant to a previously adopted agreement, the building and loan association merged into another building and loan association. Held, the bonus distribution is deductible as a dividend under
75 T.C. 262">*262 OPINION
Respondent determined deficiencies in petitioner's Federal income taxes for the taxable years ending 75 T.C. 262">*263 December 31, 1969, December 31, 1970, December 31, 1971, the taxable period January 1 through September 30, 1972, 1 and the taxable year ending December 31, 1973, 2 as follows:
Year | Deficiency |
1969 | $ 2,608.72 |
1970 | 3,177.67 |
1971 | 3,844.35 |
Jan. 1 through Sept. 30, 1972 | 2,336.79 |
1973 | 21,022.46 |
Concessions having been made by petitioner, the sole issue remaining for decision is whether a distribution to depositor shareholders by a domestic building and loan association may be deducted under
All the facts have been stipulated and are so found. The stipulation1980 U.S. Tax Ct. LEXIS 29">*32 of facts together with the exhibits attached thereto are incorporated herein by this reference. The pertinent facts are as follows. Midwest Savings Association (hereinafter petitioner or Midwest), formerly the Evanston Building & Loan Co. (hereinafter Evanston), is a corporation organized under the laws of the State of Ohio with its principal place of business in Ohio. South Side Loan & Building Co. (hereinafter South Side), was a corporation organized under the laws of the State of Ohio with its principal place of business in Ohio. During the years in question, Evanston and South Side were domestic building and loan associations chartered and supervised as savings and loan or similar associations under the laws of the State of Ohio.
South Side filed its Federal income tax returns for the taxable years in question with the District Director of Internal Revenue, Cincinnati, Ohio. Evanston filed its Federal income tax return for its taxable year ending December 31, 1973, with the District Director of Internal Revenue, Cincinnati, Ohio.
All South Side depositors were owners of withdrawable shares which were considered stock for shareholder voting purposes 75 T.C. 262">*264 including voting1980 U.S. Tax Ct. LEXIS 29">*33 for directors and all other matters reserved to the approval of shareholders under Ohio law. The bylaws of South Side designated the withdrawable shares as savings shares or investment shares and provided that all deposits evidenced by such shares were entitled to receive dividends out of earnings.
Evanston was owned by those of its depositors who were holders of savings share or investment share accounts. However, Evanston also had deposit accounts which had no ownership rights. The Evanston savings share and investment share account holders had voting and dividend rights similar to those of South Side share account holders.
By letter to South Side dated February 9, 1972, Evanston proposed a merger of South Side into Evanston. Therein, Evanston suggested that South Side distribute a 4-percent bonus payment to its share account holders prior to the merger. The proposed merger was in due course submitted to the shareholders and directors of each institution and duly approved. On September 27, 1972, an agreement of merger between Evanston and South Side was filed with the secretary of state of Ohio, to be effective as of the close of business on September 30, 1972. Midwest Savings1980 U.S. Tax Ct. LEXIS 29">*34 Association, formerly Evanston, 3 is the successor in interest to the assets and liabilities of South Side.
Pursuant to the agreement of merger, each holder of withdrawable shares in South Side was offered the choice of one of the following options or any combination thereof in converting his account to an account in Evanston:
During business hours on September 30, 1972, and thus, prior to the merger, savings share account holders of South Side were credited with a 4-percent bonus distribution on the books of South Side. Investment share account holders were issued a 4-percent bonus distribution by checks of South Side. These distributions, totaling $ 137,069.28, were charged to the undivided profits account of South Side.
South Side had regularly declared semiannual dividends payable on March 31 and September 30 of each year, and during 1972, South Side declared regular dividends on its shareholder accounts payable on March 31, and September 30, 1972. The deductibility of these distributions is not at issue.
In its Federal income1980 U.S. Tax Ct. LEXIS 29">*36 tax return for the taxable period January 1, 1972, through September 30, 1972, South Side deducted $ 137,069.28 under
Although this Court has previously considered the provisions of
1980 U.S. Tax Ct. LEXIS 29">*37 A review of the history of
In
As petitioner has acknowledged, the stated purpose of section 313 of the Revenue Act of 1951, which contained the predecessor provisions of
In operation the provisions of the 1951 Revenue Act have left mutual savings banks untaxed because interest and dividends paid to depositors are deductible under
It is the threat of taxation which forces the distribution of interest to depositors.
Petitioner contends that the 4-percent bonus distribution paid or credited by South Side to share account holders on September 30, 1972, is fully deductible under the clear language of
Respondent's primary argument in support of his disallowance of the deduction at issue is that the distribution by South Side was not the type of distribution which Congress intended to be deductible under
As part of his argument, respondent urges this Court to view the payments to the share account holders of South Side as paid by Evanston as part of the purchase price of the assets of South 75 T.C. 262">*268 Side pursuant to the merger1980 U.S. Tax Ct. LEXIS 29">*42 agreement between Evanston and South Side and added to Evanston's basis in those assets. 5 We hold such characterization to be improper.
In so holding, we are not unmindful of the doctrine that the substance of a transaction governs its taxation.
Neither of the parties has favored us with evidence concerning negotiations between Evanston and South Side preceding the merger proposal contained in Evanston's letter of February 9, 1972. Nevertheless, the inference is obvious, based on the tenor of that letter, that such negotiations occurred and that the bonus distribution was discussed during the negotiations. Further, the bonus distribution was suggested by Evanston in its letter containing the merger proposal. However, we do not think this set of facts and inferences warrants characterization of the distributed amounts as a portion of the purchase price paid by Evanston for the assets of South Side.
The distribution was declared prior to the merger by a vote of the South Side share account holders and paid or credited to those share account holders prior to the merger. The amounts distributed were subject to withdrawal on demand by the account holders, and, in some cases, amounts were withdrawn from the1980 U.S. Tax Ct. LEXIS 29">*44 savings share accounts after such accounts were credited with the distribution and prior to the merger of South Side into Evanston. The share account holders had complete dominion and control both prior to and after the merger over the amounts distributed. Moreover, the payment was made from the funds of South Side and charged against the earnings and profits of South Side.
75 T.C. 262">*269 Respondent has not asserted that the bonus distribution was a sham. Indeed, we perceive no sham aspect in the transaction. See
Concerning respondent's primary argument -- that a deduction under
Moreover, 1980 U.S. Tax Ct. LEXIS 29">*46 we have searched the legislative history without success for a scintilla of support for respondent's position. Congress employed the word "dividend" without modification, limitation, or diminution, and the record is bare of any purported intent that only dividends akin to interest were in the minds of the writers of the statute. With this background, we are hard pressed to read into the statute any definition of dividend other than the customary definition contained in section 316 of the Code and in respondent's regulation thereunder. 71980 U.S. Tax Ct. LEXIS 29">*47 This definition 75 T.C. 262">*270 extends to any distribution of property "even though extraordinary in amount" made out of earnings and profits. We believe that the 4-percent bonus distribution paid or credited by South Side to its depositors on September 30, 1972, was a dividend and, since it was made by an institution described in
We agree with petitioner that in effect respondent asks this Court to construe
It is not without significance that from 1951 to 1962, Congress saw no reason to limit or even to define the term dividend as used in
Due to concessions by the petitioner,
*. By order of the Chief Judge dated July 1, 1980, this case was reassigned from Judge Darrell D. Wiles to Judge Sheldon V. Ekman.↩
1. These deficiencies were determined against Midwest Savings Association, formerly Evanston Building & Loan Co., as successor in interest to the assets of South Side Loan & Building Co.↩
2. This deficiency was determined against Midwest Savings Association, formerly Evanston Building & Loan Co.↩
3. The record does not make clear whether the change from Evanston to Midwest Savings Association was a change in name only. In any case, the parties are in agreement concerning Midwest's liability for any deficiencies determined herein.↩
4.
DEDUCTION FOR DIVIDENDS PAID ON DEPOSITS.
In the case of mutual savings banks, cooperative banks, domestic building and loan associations, and other savings institutions chartered and supervised as savings and loan or similar associations under Federal or State law, there shall be allowed as deductions in computing taxable income amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends or interest on their deposits or withdrawable accounts, if such amounts paid or credited are withdrawable on demand subject only to customary notice of intention to withdraw.↩
5. Respondent cites
6. Respondent argues that the implicit intent of Congress to limit the definition of dividends under
7.
"The term "dividend" for the purpose of subtitle A of the Code * * * comprises any distribution of property as defined in section 317 in the ordinary course of business, even though extraordinary in amount, made by a domestic or foreign corporation to its shareholders out of either --
"(i) Earnings and profits accumulated since February 28, 1913, or
"(ii) Earnings and profits of the taxable year computed without regard to the amount of the earnings and profits (whether of such year or accumulated since February 28, 1913) at the time the distribution was made."↩
8. Respondent has not raised, and we do not address, the issue of whether the amounts paid to investment shareholders by check dated Sept. 30, 1972, were paid during the taxable period Jan. 1, 1972, through Sept. 30, 1972, within the purview of