*1737 Amount in excess of subscription payments made by petitioner to a building and loan association, paid to petitioner upon completion of its subscription payments and withdrawal thereof, held to be dividends, and excluded from petitioner's taxable income under the provisions of section 234(a) of the Revenue Act of 1924.
*1279 This proceeding involves the determination of petitioner's incometax liability for the year 1924, in which respondent has asserted a deficiency in the amount of $3,983.56, based upon the inclusion in petitioner's income for that year of the sum of $32,839, which sum petitioner contends was included in error.
FINDINGS OF FACT.
Petitioner was a corporation, organized and existing under the laws of the State of New Jersey, having its principal office at Newark, N.J., where it was engaged in the grocery business. Under date of April 1, 1924, the corporation was duly dissolved and the acts necessary to the final termination of its affairs were thereafter undertaken by*1738 its then directors, serving as trustees in accordance with the statutes in such case made and provided.
In March, 1916, petitioner subscribed for the purchase of 1,000 shares of the capital stock of the Fourteenth Ward Building and Loan Association of the city of Newark (hereinafter referred to as the Association), which is a domestic corporation. The Association has heretofore claimed exemption from tax as a building and loan association, which claim respondent has not denied. At the time of subscribing for said stock petitioner paid a membership fee of $1, *1280 and thereafter made 97 monthly payments of $1,000 each on the purchase price of the stock for which it had subscribed, making the total amount paid in by petitioner on account of its membership fee and subscription $97,001.
Thereafter, petitioner applied to the board of directors of the Association for the withdrawal of its investment in said stock and on March 18, 1924, received from said Association the sum of $129,840 in full payment thereof.
The sum of $32,839, being the excess of the amount received by petitioner from the Association as aforesaid, over the amount paid in by petitioner on account of*1739 its membership fee and subscription payments, respondent has included in determining petitioner's taxable income for the year 1924.
The constitution of the Association, and the amendments thereto, are in evidence and are incorporated herein by reference. They disclose that the Association computes its profits quarterly and credits a pro rata share of such profits to the shares of each member. This action continues throughout the life of the membership, so that upon its termination, assuming there are no unpaid fines asserted against the member and no losses sustained by the Association of which the member must bear his proportionate share, the member's account shows a credit to him of the amounts paid in for membership fee and upon his stock subscription and, in addition, his proportionate share of the net profits of the Association earned during the period of his membership. This amount, and no more, the member may receive upon his withdrawal.
OPINION.
GOODRICH: There is but one issue in this case, namely, whether there should be included in petitioner's taxable income for the year 1924 the sum of $32,839, which is the excess of the amount received by petitioner from the*1740 Association upon the withdrawal of its investment therein, over the amount paid in by petitioner on account of its membership fee and stock subscription in the Association.
Petitioner contends that this amount is a dividend from a domestic corporation and that as such it is exempt from taxation in the hands of a corporate recipient under the provisions of section 234(a)(6) of the Revenue Act of 1924. It urges further that the partial exemption from taxation of dividends or interest from a building and loan association in the hands of an individual recipient applies also to such payments in the hands of a corporate recipient.
Respondent admits that if this sum represents an ordinary dividend, it is a dividend from a domestic corporation and so exempt dend, it is a dividend from a domestic corporation and so exempt from tax under the above cited statutory provisions. He denies *1281 however that it is a dividend and in his deficiency notice asserts that it is a payment of interest. He contends further that the statutory exemption of dividends or interest from such an Association is limited strictly to "individuals" by section 213(b)(1) of the Revenue Act of 1924 and that*1741 therefore a corporation, although included in the term "person," is not entitled to the benefits thereof.
It is first necessary to determine the exact character of the payment received by petitioner from the Association. Was the excess beyond its subscription payments which petitioner received a dividend upon the stock it purchased, or was it interest upon deposits made with the Association? At the outset we must note the difference which generally exists between so-called shares of stock of a building and loan association and stock of an ordinary commercial corporation. In the former, when a member has completed payment of the amount for which he subscribed, by payment of the periodical installments or dues, his shares are then automatically canceled and may be reissued to him or to another member on the same terms. And, at that time, he may withdraw all dues paid by him, together with his pro rata share of the net profits, if any, earned by the Association during the period of his membership. In the ordinary commercial corporation, the stock is issued to the subscriber when he has completed his subscription payments. He then begins to participate fully in the earnings of*1742 the corporation as distributions thereof are made in the form of dividends, and this continues until the corporation is dissolved, whereupon he is entitled to a pro rata share in the net assets of the corporation. We must determine, then, the nature of this Association, its method of operation, and the rights and privileges of its stockholders or members, and for this purpose rely upon the constitution of the Association, and the amendments thereto, the material provisions of which we have outlined in our findings of fact.
Under these provisions it is obvious that by completing payment of his stock subscription, a member becomes entitled, not to any interest in the assets of the corporation, but only to a pro rata share of the net profits of the corporation, earned during the life of his membership. It is obvious also that this increase, if any, upon the amount of his subscription payments is not in the nature of interest upon his payments, for it accrues at no fixed rate and, indeed, may not accrue at all should the corporation fail to make a profit from its operations during the term of the membership. (See *1743 .) It is our opinion, therefore, that the sum of $32,839 received by petitioner from the Association in excess of the amounts paid in by petitioner on account of its membership fee and stock subscription, was a dividend received from *1282 a domestic corporation and, as such, should not be included in determining petitioner's taxable income for the year 1924.
The case at bar is clearly controlled by the decisions of the United States Supreme Court in , and by , and , heretofore decided by this Board.
Under the view which we take of this case it becomes unnecessary to decide whether the statutory exemption of dividends or interest from a building and loan association applies when in the hands of a corporate recipient.
Judgment will be entered for petitioner.