Midwest Savings Association v. Commissioner, 75 T. C. 270 (1980)

A building and loan association’s bonus distribution to depositor shareholders is deductible under section 591 of the Internal Revenue Code if it meets the statutory requirements for dividends.

Summary

In Midwest Savings Association v. Commissioner, the Tax Court ruled that a 4% bonus distribution made by South Side Loan & Building Co. to its depositor shareholders before merging with Evanston Building & Loan Co. was deductible under section 591 of the Internal Revenue Code. The key issue was whether the bonus distribution, made out of the association’s earnings and profits, qualified as a deductible dividend. The court held that the distribution met the statutory requirements of section 591, being a dividend paid from earnings and profits to depositors, and was thus deductible. This decision emphasized a strict interpretation of the statute’s language, rejecting the IRS’s argument that the distribution should be analogous to interest payments by commercial banks to be deductible.

Facts

Midwest Savings Association, formerly Evanston Building & Loan Co. , was the successor to South Side Loan & Building Co. after a merger in 1972. Prior to the merger, South Side proposed and its shareholders approved a 4% bonus distribution to depositor shareholders, which was credited to savings accounts or paid by check to investment account holders on September 30, 1972. The bonus was charged to South Side’s undivided profits account. The IRS disallowed South Side’s deduction of this bonus under section 591, leading to the litigation.

Procedural History

The IRS disallowed South Side’s deduction of the bonus distribution under section 591, resulting in deficiencies for the taxable years 1969 through 1973. Midwest Savings Association, as South Side’s successor, petitioned the Tax Court for redetermination of these deficiencies. The case was reassigned from Judge Darrell D. Wiles to Judge Sheldon V. Ekman. The Tax Court ruled in favor of Midwest, holding that the bonus distribution was deductible under section 591.

Issue(s)

1. Whether a 4% bonus distribution by South Side Loan & Building Co. to its depositor shareholders qualifies as a deductible dividend under section 591 of the Internal Revenue Code?

Holding

1. Yes, because the bonus distribution met the statutory requirements of section 591, being a dividend paid from earnings and profits to depositors, and was withdrawable on demand.

Court’s Reasoning

The court applied a strict interpretation of section 591, which allows deductions for amounts paid or credited to depositors as dividends or interest, provided they are withdrawable on demand. The court found that the bonus distribution was indeed a dividend under section 316 of the Code, as it was a distribution of property from earnings and profits. The court rejected the IRS’s argument that the distribution must be analogous to interest payments by commercial banks to be deductible, noting that Congress had used the term “dividend” without limitation in section 591. The court also dismissed the IRS’s suggestion that the bonus was part of the purchase price for South Side’s assets, as the distribution was made by South Side before the merger and was not a sham. The decision emphasized adherence to the statute’s clear language over implied legislative intent.

Practical Implications

This decision clarifies that building and loan associations can deduct bonus distributions to depositors under section 591 if they meet the statutory criteria, without needing to show similarity to interest payments by commercial banks. Legal practitioners should ensure that such distributions are clearly from earnings and profits and are withdrawable on demand to qualify for the deduction. This ruling may encourage building and loan associations to make similar distributions as a tax planning strategy. Subsequent cases have followed this precedent, reinforcing the importance of statutory language over perceived legislative intent in tax law interpretations.