Rev. Rul. 69-147

Advice has been requested as to the proper dividend or interest deduction by an organization described in section 591 of the Internal Revenue Code of 1954 (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) as of the end of the organization's taxable year with respect to unmatured savings certificates. Advice has also been requested whether an individual holder of the unmatured savings certificate constructively received interest income as of the end of the certificate holder's taxable year.

The organization in the instant case, a calendar year taxpayer, issues a non-negotiable and nontransferable savings certificate. The certificate holder, also a calendar year taxpayer, is guaranteed a 51/4 percent dividend per annum if the certificate is held for a period of 12 months after the issue date (maturity). If the certificate holder surrenders the certificate before 6 months the dividend will be paid at the rate of 41/2 percent per annum (the normal passbook rate). If the certificate holder surrenders the certificate after 6 months and before 9 months the dividend will be paid at the rate of 43/4 percent per annum. If the certificate holder surrenders the certificate after 9 months and before 12 months the dividend will be paid at the rate of 5 percent per annum.

With respect to the deductibility of dividends or interest by the organization in the instant case, section 591 of the Code provides, in pertinent part, that 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.

The short-term savings certificates in the instant case are distinguishable from the long-term thrift plans contemplated by section 1.591-1(b) of the Income Tax Regulations.

The organization is therefore allowed to deduct dividends or interest on unmatured savings certificates as of the end of its taxable year only to the extent of the dividend or interest rate that would have been credited or paid to the certificate holder had the certificate holder chosen to surrender the certificate at the end of the organization's taxable year. To illustrate, assume that a 12-month savings certificate was issued by the organization on June 1, 1966. Under the conditions of the savings certificate in the instant case the holder of the savings certificate would have received a dividend at the rate of 43/4 percent per annum had the certificate holder surrendered the certificate on December 31, 1966.

Accordingly, the dividend deduction on the unmatured certificate allowable under section 591 of the Code as of December 31, 1966, should be computed at the rate of 43/4 percent per annum.

With respect to whether the holder of an unmatured savings certificate constructively received interest income, section 1.451-2(a) of the regulations provides, in pertinent part, that income although not actually reduced to a taxpayer's possession is constructively received by him in the taxable year during which it is credited to his account, set apart for him, or otherwise made available so that he may draw upon it at any time, or so that he could have drawn upon it during the taxable year if notice of intention to withdraw had been given. However, income is not constructively received if the taxpayer's control of its receipt is subject to substantial limitations or restrictions.

The phrase "or otherwise made available" was added to the first sentence of paragraph (a) of section 1.451-2 of the regulations to make it clear that it is the right of withdrawal during the taxable year, rather than the formal setting apart or crediting of income, which causes such income to be constructively received. See Rev. Rul. 66-45, C.B. 1966-1, 95. Furthermore, section 1.451-2 of the regulations states, in pertinent part, that in the case of interest, dividends, or other earnings (whether or not credited) payable in respect of any deposit or account in a bank, building and loan association, savings and loan association, or similar institution, the following are not substantial limitations or restrictions on the taxpayer's control over the receipt of such earnings: (1) the fact that the taxpayer would, by not withdrawing the earnings until a later date, receive a higher rate of earnings than would be payable if the earnings are withdrawn during the taxable year; (2) a requirement that the earnings may be withdrawn only upon a withdrawal of all or part of the deposit or account; and (3) a requirement that a notice of intention to withdraw must be given in advance of withdrawal.

Accordingly, the criteria for determining constructive receipt of dividend or interest income by the holder of an unmatured savings certificate as of the end of the certificate holder's taxable year is the amount of dividends or interest that would have been received by him had he chosen to surrender the certificate at the end of his taxable year. In the above illustration, the individual holder of an unmatured 12-month savings certificate that was issued on June 1, 1966, constructively received interest income at the rate of 43/4 percent per annum as of December 31, 1966.

Furthermore, the organization must report the interest constructively received by the certificate holder at the appropriate rate (43/4 percent rate in the above illustration) on information returns, Forms 1096 and 1099, in accordance with section 6049 of the Code.