Frontier Sav. Ass'n & Subsidiaries v. Comm'r of Internal Revenue
| Decision Date | 24 September 1986 |
| Docket Number | Docket Nos. 16209-81,24559-83. |
| Citation | 87 T.C. 665,87 T.C. No. 40 |
| Parties | FRONTIER SAVINGS ASSOCIATION AND SUBSIDIARIES, Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent |
| Court | U.S. Tax Court |
OPINION TEXT STARTS HERE
In 1978 and 1979, petitioner, a stockholder of the Federal Home Loan Bank of Chicago (the ‘Chicago Bank‘), received common stock dividends from the Chicago Bank. Also in 1978 and 1979, some of the stockholders requested that a portion of their shares of common stock in the Chicago Bank be redeemed. As it had in prior years, the Chicago Bank redeemed all shares of its common stock it was requested to redeem. HELD, no stockholder had an election within the meaning of sec. 305(b)(1), I.R.C. 1954, to receive cash dividends in lieu of common stock dividends because the Chicago Bank retained discretion over the redemption of its common stock. Petitioner is not taxable on the value of the common stock dividends received in 1978 and 1979. Robert A. Schnur, for the petitioner.
Mark D. Petersen, for the respondent.
In statutory notices of deficiency dated June 3, 1981, and August 12, 1983, respondent determined deficiencies in petitioner's Federal income tax liabilities as follows:
+-------------------+
¦Years¦Deficiencies ¦
+-----+-------------¦
¦1977 ¦$1,628.15 ¦
+-----+-------------¦
¦1978 ¦19,376.14 ¦
+-----+-------------¦
¦1979 ¦17,887.00 ¦
+-------------------+
These cases have been consolidated for purposes of trial, briefing, and opinion.
Following concessions, the issue remaining for decision is whether stock dividends received by petitioner in 1978 and 1979 from the Federal Home Loan Bank of Chicago are taxable to petitioner under section 305(b)(1). 1 The resolution of this issue will affect the taxability of stock dividends received by the other 496 stockholders of the Federal Home Loan Bank of Chicago which also received stock dividends in 1978 and 1979.
Some of the facts have been stipulated and are so found.
Petitioner, Frontier Savings Association (‘Frontier Savings‘), is a mutual savings and loan association which was organized on February 19, 1919. It operates as a mutual savings association pursuant to Wisconsin law. The principal corporate office of Frontier Savings is located in Green Bay, Wisconsin. Frontier Savings and its subsidiaries timely filed consolidated Federal Corporation Income Tax Returns (Forms 1120) for each of the years 1978 and 1979.
Frontier Savings has been a member and stockholder of the Federal Home Loan Bank of Chicago (the ‘Chicago Bank‘) at all times since the organization of the Chicago Bank. The Chicago Bank is one of 11 district banks (12 prior to 1946) established pursuant to the Federal Home Loan Bank Act of 1932, 47 Stat. 725, 12 U.S.C. sec. 1421 et seq. The district banks were capitalized with stock subscriptions from member institutions and the U.S. Treasury. District banks operate under the supervision of the Federal Home Loan Bank Board, an administrative agency in the Executive branch of the Federal government. The Federal Home Loan Bank Board also is the chartering and regulatory authority for Federal savings and loan associations and Federal mutual savings banks.
The Federal Home Loan Bank system was designed primarily as a reserve credit facility for savings and loan associations and other home mortgage credit institutions. Savings and loan associations (such as Frontier Savings) and mutual savings banks that are members or stockholders in the district banks (hereinafter referred to as ‘members‘ or ‘member banks‘) are required by Federal law to maintain a certain capital stock ownership in the respective district banks of which they are members. The stock ownership requirements are determined at the end of each calendar year and are calculated with reference to each member bank's net home mortgage loans outstanding and total borrowings of each member from the district bank.
Each member bank generally must maintain a capital stock ownership interest in the district bank in an amount equal to at least one percent of the total outstanding balance of its home mortgage loans 2 and at least equal to one-twelfth 3 of total outstanding borrowings of the member bank from the district bank, as of December 31 of each year. Each share of stock in the district banks is valued by statute at its $100 par value. See 12 U.S.C. sec. 1426(b) and (c) (1978).
Based upon the above year-end calculations, member banks that are required to purchase additional stock of district banks must do so by January 31 of the following year at the par value of $100 per share. Member banks that own stock in district banks in excess of the required number of shares (‘excess shares ‘) may request that excess shares be redeemed by the district banks.
The policy of the Chicago Bank with respect to the redemption of excess shares is reflected in the minutes of a June 18, 1979, meeting of the Chicago Bank's board of directors, as follows:
BE IT RESOLVED, that the President of the Bank or any officer designated by him may from time to time increase or decrease the amount of stock of any member in accordance with Section 6 of the Federal Home Loan Bank Act »i.e., 12 U.S.C. section 1426(c)† and the Regulations for the Federal Home Loan Bank System; provided, however, that in exercising the Bank's discretion whether or not to grant an application by a member to decrease its stock, the President or his designee shall be guided by all applicable statutory and regulatory provisions, all policies and standards adopted from time to time by this Board, including, but not limited to, the Bank's credit standards contained in the ‘Policies Governing Extension of Credit‘ as adopted by this Board and all relevant facts and circumstances.
As of December 31, 1977, Frontier Savings owned 6,721 shares of stock in the Chicago Bank, all of which it had purchased over many years from the Chicago Bank at $100 per share. On that day, the principal amount of Frontier Savings' outstanding mortgage loans and borrowings from the Chicago Bank was such that, prior to January 31, 1978, Frontier Savings was required to increase its stock interest in the Chicago Bank to 9,066 shares. Accordingly, during January of 1978, Frontier Savings purchased 2,345 additional shares of the common stock of the Chicago Bank for $234,500. Frontier Savings neither purchased nor sold any additional shares of common stock in the Chicago Bank in 1978, so that as of December 28, 1978, Frontier Savings owned 9,066 shares of the common stock of the Chicago Bank.
As stockholders in district banks, member banks are entitled to receive dividends that are declared by district banks. Prior to December 29, 1978, dividends were paid by the Chicago Bank to its member banks in the form of cash. On December 29, 1978, dividends were paid by the Chicago Bank to its member banks in the form of additional shares of common stock. On December 31, 1979, dividends were paid by the Chicago Bank to its member banks half in stock and half in cash.
At a meeting held on November 20, 1978, the board of directors of the Chicago Bank adopted a resolution to pay a 6.58-percent dividend to its stockholders of record as of December 31, 1978. Subject to the approval of the Federal Home Loan Bank Board, the resolution stated that the dividend would be paid in the form of shares of stock in the Chicago Bank. On December 22, 1978, the Director of the Office of District Banks, Federal Home Loan Bank Board, wrote a letter to the President of the Chicago Bank approving the stock dividend.
On December 22, 1978, the Chicago Bank mailed a bulletin to its member banks, informing them that a 6.58-percent stock dividend would be paid, with fractional shares to be paid in cash. The explanation made in the bulletin for paying a stock dividend, rather than a cash dividend, was as follows:
(1) Providing a stock rather than a cash dividend may enable your association to defer the payment of income taxes on the value of the stock dividend. You may wish to consult your tax adviser for the proper handling of a stock dividend.
(2) A stock dividend can be applied toward satisfying the stock investment requirement for members that experienced a growth in assets during 1978 or that will be required to purchase additional stock due to increased borrowings from the Bank.
The bulletin also explained that most member banks would be required to increase their stock holdings in the Chicago Bank due to that year's general increase in outstanding home mortgage loans.
On December 29, 1978, 4 the Chicago Bank distributed the 1978 stock dividend by (1) crediting the appropriate number of whole shares of stock to the stock account of each member bank, (2) crediting an appropriate amount of cash with respect to fractional shares to the demand account of each member bank, and (3) issuing a new stock certificate to each member bank. Each new stock certificate reflected the total number of shares of stock held by each member bank before the stock dividend, the number of shares of stock distributed pursuant to the dividend, and the total number of shares of stock owned by each member bank after distribution of the dividend. The Chicago Bank maintained records of the stock ownership accounts of its member banks.
On December 29, 1978, a total of 234,620 shares of common stock was distributed by the Chicago Bank as a stock dividend to its 497 member banks. On December 29, 1978, Frontier Savings received 588 shares of common stock in the Chicago Bank (and cash representing fractional shares in the amount of $51.07) as its share of the 1978 stock dividend.
Enclosed with the December 22, 1978, bulletin mailed by the Chicago Bank to its member banks describing the 1978 stock dividend was a form entitled ‘Calculation of Bank Stock...
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