*137 Decision will be entered for petitioner.
Petitioner is a Federal savings and loan association. The first year for which it was subject to the income tax on corporations was 1952. It paid dividends for accounting periods ending on June 30 and December 31 to two classes of shareholders, investment and savings. In 1952, petitioner's directors instituted a change in policy by which the dividends for the last 6 months of 1952 were withdrawable on demand by both classes of shareholders at the opening of business on December 31, 1952. Previously, the policy had been that the dividends for the last 6 months of a year were not withdrawable on demand prior to January 2 of the succeeding year. Held, (1) that the dividends to both classes of shareholders for the last 6 months of 1951 were deductible in 1952; and that (2) such dividends for the last 6 months of 1952 were deductible in 1952. Citizens Federal Savings & Loan Assn. of Covington, 30 T.C. 285">30 T.C. 285, followed and distinguished.
*869 The Commissioner determined deficiencies in income tax for the taxable years 1952 and 1953 in the amounts of $ 12,469.23 and $ 9,725.83, respectively. The question is whether, under section 23(r)(1), 1939 Code, dividends declared by petitioner on its earnings for the 6-month period ended December 31, 1951, are deductible in 1952.
FINDINGS OF FACT.
Petitioner is a Federal savings and loan association. Its office is located in Chester, West Virginia. Petitioner filed its returns with the collector of internal revenue for the district of West Virginia.
*870 Petitioner keeps its books and files its returns on a cash basis and on the basis of a calendar year.
Since November 3, 1934, petitioner has been a Federal savings and loan association under Charter E, which became Charter K, of the Home Owners Loan Act of 1933. Petitioner's main source of income is*139 interest on mortgage loans, interest on Government securities, and rents. Petitioner's capital structure includes shares of stock having a par value of $ 100 per share, which are known as investment shares. Another part of petitioner's capital structure consists of deposit funds belonging to various depositors. For corporate voting purposes the amounts of deposits divided by 100 determine units which are referred to as savings shares.
Investment shares and savings shares, both, are entitled to share equally in any dividend distribution. For many years, including 1951, 1952, and 1953, petitioner consistently has declared and paid dividends semiannually.
As of the end of 1951 and 1952, the investment accounts and shares in petitioner, and the savings accounts and shares were as follows:
| Investment | Savings | |||
| December 31 -- | ||||
| Accounts | Number of | Accounts | Amount | |
| shares | ||||
| 1951 | 246 | 7,775 | 2,175 | $ 4,237,877 |
| 1952 | 249 | 8,098 | 2,326 | 4,776,477 |
Since May 22, 1942, petitioner's operations have been carried on under paragraph 9 of Charter K, as amended, of the Home Owners Loan Act of 1933, which relates to reserves, undivided profits, and dividends. In material *140 part, it provides as follows:
9. Reserves, undivided profits, and dividends. -- As of June 30 and December 31 of each year, after payment or provision for payment of all expenses and appropriate transfers to the reserve required below, and additional transfers to other reserve accounts, and provision for an undivided profits account, the board of directors shall declare as dividends the remainder of the net earnings of the association for the 6 months' period. All dividends shall be declared as of said dividend dates. The board of directors may declare dividends as of said dividend dates payable out of the amounts remaining from previous periods in the undivided profits account. Profits to holders of share accounts shall be termed dividends (except bonus payments) and shall not be referred to as interest. * * * Dividends upon investment share accounts shall be promptly paid in cash as of the dividend date. Dividends on savings share accounts shall be credited to such share accounts on the books of the association as of the dividend date. All holders of share accounts shall participate equally in dividends pro rata to the participation value of their share accounts; provided *141 that the association shall not be required to credit dividends on inactive share accounts of $ 5 or less. Except as provided above, dividends shall be declared on the participation value of each share account at the beginning of the dividend period, plus the share payments made during the dividend period (less amounts *871 repurchased and noticed for repurchase and, for dividend purposes, deducted from the latest previous share payments), computed at the dividend rate for the time invested, determined as provided below. The date of investment shall be the date of actual receipt of such share payments by the association, unless the board of directors fix a date, not later than the tenth of the month, for determining the date of investment of payments on either investment or savings share accounts or on both types of share accounts. Share payments, affected by such determination date, received by the association on or before such determination date, shall receive dividends as if invested on the first of such month. Share payments, affected by such determination date, received subsequent to such determination date, shall receive dividends as if invested on the first of the next*142 succeeding month. * * *
Petitioner consistently has declared dividends for 6-month periods ending on June 30 and December 31, as of those dates.
At all times petitioner has made payment of the dividends on investment shares by the issuance of its checks made payable to the owners of investment shares, and such checks always have been mailed to such shareholders.
On the other hand, the owner of savings shares can receive payment of a dividend on such shares only by presenting to petitioner his savings share deposit and withdrawal book, or passbook, and at the time the passbook is presented to petitioner an entry is then made in the passbook crediting the amount of a dividend to the holder of savings shares, which amount has previously been credited on the ledger card of the holder of savings shares. Payment of a dividend on savings shares is made in cash. Petitioner is not allowed to keep the passbooks of holders of savings shares and, therefore, petitioner does not have in its possession any of the savings shares passbooks on dividend dates in which entries could be made crediting amounts of dividends as of dividend dates, followed by the mailing of passbooks to holders of savings*143 shares.
The accounting procedures of petitioner relating to the making of entries on its books of the semiannual dividends payable to holders of both investment shares and savings shares, and petitioner's policy with respect to the time of making payments of all dividends on both classes of shares are described hereinafter.
All Federal savings and loan associations were exempt from Federal income tax for all taxable years ending on or prior to December 31, 1951. The Congress, by the enactment of section 313 of the Revenue Act of 1951, removed the tax exemption of savings and loan associations, and they became subject to taxation with respect to taxable years beginning after December 31, 1951. Accordingly, the first year for which petitioner became liable for income tax was the calendar year 1952. Also, section 313(f) of the Revenue Act of 1951, amended section 23(r) of the 1939 Code by inserting a new subsection, subsection (1), which provided for the allowance of deduction of *872 dividends, so that in computing its taxable income for 1952, petitioner was entitled to deduct dividends in accordance with the provisions of section 23(r)(1).
On December 12, 1952, the Home Loan*144 Bank Board, the Federal agency charged with regulating Federal savings and loan associations, addressed the following letter to member savings and loan associations, including petitioner:
To the Federal Association Addressed:
Since the Regulations of the Bureau of Internal Revenue provide that dividends are allowable as a deduction from gross income for the taxable year in which such dividends may be withdrawn by the savings account holder, the Home Loan Bank Board has considered and passed upon the following question:
May a Federal association on the last business day of the six months' accounting period distribute cash dividends and permit the withdrawal of dividends credited for that accounting period?
The Board has answered this question in the affirmative inasmuch as it considers all dividend and withdrawal transactions occurring on the last business day of the six months' accounting period as having taken place at the close of business on that day.
The following closely related question has also been considered by the Home Loan Bank Board:
May a Federal association pay dividends on savings withdrawn on the last business day of the dividend period?
The answer to this*145 question is "Yes," for the reason stated above.
In view of the importance of this matter, we suggest that you confer with your counsel in deciding upon the method by which you advise your members and otherwise deal with the subject.
Yours very truly,
(signed) J. W. Whittaker
J. W. WhittakerSupervisory AgentThe substance of the above advice to member associations by the Home Loan Bank Board is that the Home Loan Bank Board issued a ruling on December 12, 1952, to the effect that a Federal association could permit, on the last business day of a 6-month accounting period, the withdrawal of dividends credited for that period and, further, that such association could pay dividends on savings withdrawals made on the last business day of a dividend period.
Petitioner gave effect to the above ruling in a resolution of its board of directors, adopted on December 18, 1952, relating to the declaration of the dividend for the 6-month period ending December 31, 1952, in which it was stated, inter alia, that the dividend so declared was "payable as of the opening of business December 31, 1952, and that [the] dividend [shall] be promptly paid to or credited to the accounts of all*146 holders of withdrawable accounts and made available to them as of such time, subject only to the customary notice of intention to withdraw." (Emphasis supplied.)
*873 The form of the resolutions of the petitioner's board of directors declaring dividends which customarily had been used prior to the adoption of the above resolution of December 18, 1952, had not contained the wording quoted above; i.e., those resolutions had not specified that declared dividends would be payable and made available to shareholders as of the opening of business on the dividend date. Rather, the earlier resolutions had stated merely that the dividend was to be paid and/or credited as of the dividend date.
With respect to the dividend of December 31, 1951, the following resolution was adopted at a meeting of petitioner's board of directors on November 29, 1951:
Upon motion duly made, seconded and carried, it was: -- RESOLVED that a DIVIDEND (covering the 6 months period ending December 31, 1951) in the amount of one and one-half percent (1 1/2%) or at the rate of $ 1.50 per share, on the issued and outstanding stock or shares of the Assoc., to be paid and/or credited; as of December 31, 1951, pursuant*147 to and in accordance with regulations and by-laws, be and hereby is declared authorized and ordered paid and/or credited, as of December 31, 1951.
In accordance with a consistent policy in effect since at least 1925, the dividends on both investment and savings shares to and including the dividend of June 30, 1952, were not made available and subject to withdrawal, nor would the petitioner pay the dividend on either type of shares, until the first business day after the last day of the 6-month dividend period.
The origin of this long-existing policy of not making the dividends available and subject to withdrawal, and of not paying the dividends until the first business day following the date of the dividend, emanated from a policy of the board of directors based on the fact that the interest income on mortgage loans made by petitioner was computed through midnight of the last day of each 6-month period. Since the petitioner's income was not considered collectible until the end of the dividend period when the expenses were deducted, and the books closed, the dividend was not considered by the petitioner to be payable until midnight of the last day of the dividend period. This automatically*148 required that the dividend to and including the payment through June 30, 1952, could not be available and subject to withdrawal, nor paid until the first business day after the last day of the dividend period. This was in accordance with the general interpretation and practice followed by savings and loan associations operating under Charter K.
With respect to the dividend for the 6-month period ending December 31, 1951, shareholders were discouraged by the petitioner's officers from making withdrawals prior to January 1, 1952, and were informed that they would lose the dividend on any amounts withdrawn prior to January 1, 1952. The shareholder was likewise informed *874 that the petitioner could not pay dividends on any accounts on the withdrawal list as of December 31, 1951.
At various times inquiries were made by prospective depositors relative to the petitioner's rules and regulations concerning deposits, withdrawals, and dividends. In replies to these inquiries through December 31, 1951, the prospective depositor was advised that the petitioner paid dividends on July 1 and January 1 of each year for the periods ending June 30 and December 31 of each year.
In accordance*149 with this policy, the checks for payment of the dividends on investment shares, to and including the dividend payable for the 6-month period ending June 30, 1952, were not placed in the mail until the first business day following the last day of the dividend period.
An examination of all the canceled checks issued in payment of the dividend on investment shares for the dividend period ending December 31, 1951, indicated that none of the checks were canceled until periods subsequent to January 2, 1952.
With respect to any amounts on the petitioner's withdrawal list represented by applications for repurchase, or actual withdrawals evidenced by withdrawal requests made up to and including the last day of the dividend period, the amount of dividend payable for the dividend periods through June 30, 1952, to either the investment or savings shareholder would, in accordance with the requirements of petitioner's Charter and practice be reduced by the amount of the actual withdrawal or the application for repurchase. This procedure was followed for the December 31, 1951, dividend.
In the event a withdrawal were made by a savings shareholder after the dividend had been computed and a pencil*150 notation made on the subsidiary ledger card, as a consistent policy the amount of the dividend noted in pencil on the subsidiary ledger card would be changed and reduced, and the summary of the dividend control account accordingly adjusted.
As a convenience in spreading out the work and in order to avoid the administrative burden of posting the numerous subsidiary control accounts as of the last day of the dividend period, the actual physical postings would be made to the books and records of the petitioner, including the subsidiary savings shareholders' ledger cards, approximately a week prior to the last day of the dividend period.
After the final postings had been made to petitioner's records, because of the physical work and cost of adjusting the petitioner's records, the dividend payable would not be reduced proportionately if the withdrawals were nominal in amount.
With respect to requests for withdrawals of the December 31, 1952, dividend received by the petitioner from savings shareholders, the petitioner made available and subject to withdrawal and paid the *875 dividend on December 31, 1952, to the savings shareholders who requested payment of the dividend, and submitted*151 the passbook for entry. Dividend checks were also issued on December 31, 1952, to investment shareholders who requested payment.
With respect to the calendar year 1952, the petitioner computed the December 31, 1952, dividend on savings shares between December 20 and 23, 1952, and noted the amount in pencil on each shareholder's ledger card. On December 24, 1952, the total amount of the dividend was entered as of December 31, 1952, on the subsidiary ledger to the savings share control account, and also to the individual ledger cards. Withdrawals were made by 11 savings shareholders between December 20 and 27, 1952, in the total amount of $ 637, on which the dividend adjustment amounted to $ 8.90. Of the amount of $ 637 withdrawn between the above-named dates petitioner adjusted the pencil notations by reducing the amount of the dividend applicable to the aforementioned withdrawals of $ 637. Withdrawals were made by 3 savings shareholders between December 27 and December 30, 1952, inclusive, totaling $ 96.52, and involving a dividend adjustment in the approximate amount of $ 1.93. No dividend adjustment was made with respect to these withdrawals of $ 96.52. On December 31, 1952, *152 withdrawals were made by 21 savings shareholders in the total amount of $ 2,865.37. No dividend adjustment was made for these withdrawals on December 31, 1952.
Included in the amount of $ 2,865.37 withdrawn on December 31, 1952, were payments of dividends actually requested by savings shareholders in the total amount of $ 1,245.33, which were credited and paid by the petitioner. In the instance of each payment the savings shareholder submitted, in accordance with the long-established practice of the petitioner, his savings passbook.
The dividend checks for the December 31, 1952, dividend were dated December 31, 1952, and were held in the petitioner's office and made available to investment shareholders until the close of business, and then were deposited in the mail.
On December 31, 1952, at least five dividend checks in the total amount of $ 524 were transmitted to investment shareholders and cashed on that date. Four of the dividend checks totaling $ 24 were requested by investment shareholders and cashed elsewhere. One check for a dividend of $ 500 was cashed by the petitioner on December 31, 1952, and appears on the petitioner's deposit slip for its deposit of December 31, *153 1952, made at the First National Bank, East Liverpool, Ohio.
On the first income tax return filed by the petitioner for the year 1952, a deduction was claimed under the provisions of section 23(r)(1), for the dividends paid by the petitioner as follows: *876
| Dividend for 6 months | |
| ended -- | Amount of dividend |
| Dec. 31, 1951 | $ 71,799.91 |
| June 30, 1952 | 99,649.52 |
| Dec. 31, 1952 | 105,301.64 |
| Total | 276,751.07 |
Deduction of the December 31, 1951, dividend of $ 71,799.91 on the first tax return filed for the calendar year 1952, caused a net loss of $ 37,073.70 to be reflected. Respondent disallowed as a deduction in the computation of the 1952 net income of the petitioner the December 31, 1951, dividend in the amount of $ 71,799.91.
On the 1953 income tax return filed by the petitioner a deduction was claimed and allowed for dividends paid as follows:
| Dividend for 6 months | |
| ended -- | Amount of dividend |
| June 30, 1953 | $ 112,588.38 |
| Dec. 31, 1953 | 120,527.36 |
| Total | 233,115.74 |
The respondent disallowed a net operating loss carryover from the year 1952 claimed as a net operating loss deduction in the amount of $ 37,073.70 for the year 1953.
The December*154 31, 1951, dividend of the petitioner was not withdrawable on demand until the taxable year 1952. The December 31, 1952, dividend of the petitioner was withdrawable by the petitioner's shareholders on demand within the taxable year 1952.
OPINION.
Respondent, under section 23(r)(1), 1939 Code, 1 allowed petitioner a deduction in 1952 for its December 31, 1952, dividends of $ 105,301.64, but he disallowed a deduction in 1952 for the December 31, 1951, dividends of $ 71,799.91. The first question is whether all or part of the December 31, 1951, dividends were not withdrawable on demand, subject only to customary notice to withdraw, prior to January 2, 1952. If this question is decided for petitioner, respondent, in the alternative, contends that the December 31, 1952, dividends were not withdrawable on demand before January *877 2, 1953, and that, therefore, those dividends are not deductible in 1952, and, therefore, he erred in allowing deduction for them in 1952.
*155 Upon consideration of the entire record, it is concluded that under section 23(r)(1), both the December 31, 1951, and the December 31, 1952, dividends are deductible in 1952.
Viewing the record as a whole, it is concluded that on December 31, 1951, the shareholders of the petitioner could not demand and obtain payment of the dividend declared by its board of directors to be "paid and/or credited" as of that date. In accordance with the well established practice and policy of the petitioner, the dividend was considered to be payable as of the close of the business period which, under the instant circumstances, was midnight on December 31, 1951. Accordingly, the December 31, 1951, dividend was not withdrawable on demand of the shareholders until the first business day of the succeeding year which would have been January 2, 1952.
Regulations 111, section 29.23(r)(1), provide, inter alia, that amounts credited as dividends as of the last day of the taxable year which are not withdrawable by depositors or holders of accounts until the business day next succeeding are deductible under section 23(r)(1) in the year subsequent to the taxable year in which they were credited.
In view *156 of the applicable statute and regulations, the date upon which the dividends can be demanded and withdrawn, regardless of the date upon which the dividends are credited or paid, determines the taxable year in which the dividends are deductible. Thus, the year in which the dividends are deductible depends solely upon the factual finding of when the dividends were withdrawable on demand by the petitioner's shareholders.
The facts in evidence indicate that the December 31, 1951, dividend of the petitioner was declared to be paid and/or credited as of December 31, 1951. The amount was computed as to individual amounts payable. The dividend checks were prepared and dated December 31, 1951, for payment of the dividend in accordance with the usual procedure on investment shares, and the postings made crediting the general ledger control and subsidiary ledger accounts. In general, all preparations were made for payment of the dividend for the 6-month period ending December 31, 1951, to the investment and savings shareholders. However, the December 31, 1951, dividend was not made available to the petitioner's shareholders or subject to their withdrawal until on or after January 1, 1952. *157 This was in accordance with a long-existing policy of the petitioner since the dividend was a distribution of earnings for the prior 6-month periods, and those earnings were not complete until midnight of December 31, 1951. This practice was not inconsistent with the provisions of section 9 of petitioner's Charter K.
*878 The checks in payment of the proportionate part of the dividend for the 6-month period ended December 31, 1951, were dated December 31, 1951, and considered to be payable as of midnight on December 31, 1951. In the instance of the dividends payable to savings shareholders the accounts of the shareholders were credited as of December 31, 1951. Contra, however, the dividend check was not made available to the investment shareholder until the first business day during January 1952, when the dividend checks were deposited in the mail. See Avery v. Commissioner, 292 U.S. 210">292 U.S. 210. In the instance of the savings shareholders, the dividends were not available and subject to withdrawal until on or after the first business day of 1952, when the savings depositor brought his passbook into the petitioner and had the dividend credit*158 entered on the passbook. The evidential facts on this point are uncontroverted.
The evidence is conclusive that under no circumstances would the petitioner pay the respective dividend to either an investment or savings shareholder on December 31, 1951, or any prior dividend date. In fact, the petitioner's officers stated in their testimony that if either category of shareholder had demanded or requested payment on December 31, 1951, payment would have been refused. The record contains documentary evidence to corroborate this testimony of petitioner's officers. In answer to the inquiries during the year 1951 of the prospective depositors relative to the dividend payment policy of the petitioner, the prospective depositor was advised that the petitioner paid dividends on July 1 and January 1 of each year for the periods ending June 30 and December 31 of each year.
In Citizens Federal Savings & Loan Assn. of Covington, 30 T.C. 285">30 T.C. 285, 293, in which the Commissioner has acquiesced, 2 C.B. 4">1958-2 C.B. 4, we held that dividends of December 31, 1951, to investment shareholders were deductible in 1952, but that the December 31, 1951, dividends*159 to savings shareholders were not deductible in 1952. With respect to petitioner's December 31, 1951, dividends to its savings shareholders this case is distinguishable on its facts from the Citizens Federal case. There, if a savings shareholder presented his passbook on December 31, 1951, he received credit therein for the dividend. In this case, the evidence shows that the savings shareholders' dividends for the last 6 months of 1951 were not withdrawable on demand before January 2, 1952.
It is held that all of the dividends for the last 6 months of 1951 in the amount of $ 71,799.91 are deductible in 1952.
There remains for consideration respondent's alternative contention relating to the dividends of $ 105,316.04 for the last 6 months of 1952.
The facts are indisputable and stand entirely uncontroverted that the December 31, 1952, dividend was made available for withdrawal *879 on demand by both classes of shareholders at 9 a.m. on December 31, 1952. The specific resolution of the petitioner's directors declaring the December 31, 1952, dividend specifically stated that the dividend was payable as of the opening of business on December 31, 1952. Not only was the dividend*160 made available on that date at the opening of petitioner's business at 9 a.m., but dividends were actually paid to both investment and savings shareholders on December 31, 1952.
The checks for the dividend on investment shares were held at petitioner's place of business until the 3 p.m. closing time, and were issued to any investment shareholder who made demand. The checks were then mailed. The evidence shows that at least five dividend checks were issued on December 31, 1952. One check in the amount of $ 500 was actually issued and cashed by the shareholder at the petitioner's office on December 31, 1952. Also, four other dividend checks were requested by investment shareholders, were issued, and were cashed elsewhere on December 31, 1952.
The dividends on savings were also paid on December 31, 1952, to the shareholders who sent or brought their passbooks to the petitioner for entry of the dividend credit and the withdrawal charge.
The facts stand uncontroverted that the December 31, 1952, dividends on both the investment and savings shares were available and withdrawable by the shareholders on December 31, 1952. It is held that the December 31, 1952, dividends are deductible*161 under section 23(r)(1) in the taxable year 1952.
Upon the evidence in this case, it has been concluded that the dividends for the last 6 months of 1951 were not withdrawable on demand, for the purpose of section 23(r), until January 2, 1952, and that the dividends for the last 6 months of 1952 were withdrawable on demand on December 31, 1952. The holding that deduction for both amounts is allowable in 1952 under section 23(r) is in accord with Rev. Rul. 55-703, 2 C.B. 274">1955-2 C.B. 274.
Decision will be entered for petitioner.
Footnotes
1. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(r) Dividends Paid by Banking Corporations. --
(1) In the case of mutual savings banks, cooperative banks, and domestic building and loan associations, amounts paid to, or credited to the accounts of, depositors or holders of accounts as dividends 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.↩