Rev. Rul. 73-221

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 dividend or interest income as of the end of the certificate holder's taxable year.

The organization in the instant case, a calendar year taxpayer, issued a nonnegotiable and nontransferable savings certificate on June 1, 1968. The certificate holder, also a calendar year taxpayer, is guaranteed a 51/4 percent dividend or interest 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 or interest 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 or interest will be paid at the rate of 5 percent per annum. At the end of the calendar year 1968, the organization credited dividend or interest at the 51/4 percent rate on this unmatured savings certificate.

Section 1.591-1(b) of the Income Tax Regulations provides in pertinent part that if a savings and loan association maintains a bonus plan, or issues shares, or accepts deposits, subject to fines, penalties, forfeitures, or other withdrawal fees, it may deduct under section 591 of the Code the total amount credited as dividends or interest upon such shares or deposits, notwithstanding that as a customary condition of withdrawal such association has the right, pursuant to by-law, contract, or otherwise, to retain or recover a portion of the total amount invested in, or credited as earnings upon such shares or deposits or such bonus account, as a fine, penalty, forfeiture, or other withdrawal fee. In any taxable year in which such right is exercised, there is includible in the gross income of the association for such taxable year amounts retained or recovered by it pursuant to the exercise of such right.

The organization is therefore allowed to deduct the total amount credited as dividends or interest on the unmatured savings certificate as of the end of its taxable year at the rate of 51/4 percent. If the certificate holder surrenders the certificate before maturity and is entitled to a lesser rate as described above, the organization must include in its gross income for that taxable year the difference between the 51/4 percent dividend or interest rate previously credited and deducted for Federal income tax purposes and the amount of dividend or interest actually paid to the certificate holder.

With respect to whether the holder of an unmatured savings certificate constructively received dividend or 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, that causes such income to be constructively received. See Rev. Rul. 66-45, 1966-1 C.B. 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, 1968, constructively received interest income at the rate of 43/4 percent per annum as of December 31, 1968.

Furthermore, the organization must report the dividend or 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.

For deposits made after December 31, 1970, with respect to certificates of deposit (irrespective of term) and other deposit arrangements issued with original issue discount, section 1.163-4 of the regulations provides that the amount of such discount is deductible as interest and shall be prorated over the life of the obligation. Section 1.591-1(b) of the regulations, relating to deductibility of amounts credited by savings and loan associations with respect to such deposit arrangements, is not applicable whenever section 1.163-4 of the regulations is. In determining the date on which deposits with respect to certificates of deposit (or other deposit arrangements) are made, any renewal of the original term of the certificate will be treated as a new certificate as far as the Federal income tax treatment of the dividend or interest earned thereon is concerned.

However, the criteria for determining constructive receipt of dividend or interest income by holders of unmatured savings certificates of one year or less remains unchanged. See the provisions of section 1.1232-3A of the regulations relating to the inclusion of interest of original issue discount on certain obligations issued after May 27, 1969, that apply only to obligations with terms of over one year.

To the extent Rev. Rul. 69-147, 1969-1 C.B. 165 allows an organization described in section 591 of the Code to deduct dividends or interest on unmatured short-term savings certificates as of the end of its taxable year only to the extent of the dividend rate that would have been credited or paid to the certificate holder had the holder chosen to surrender the certificate at the end of the organization's taxable year, it is hereby revoked. To the extent Rev. Rul. 69-147 sets forth criteria for determining constructive receipt of dividend or interest income by holders of unmatured savings certificates of one year or less, it is hereby superseded.

The Internal Revenue Service, in the audit of Federal income tax returns, will not disturb the treatment of those organizations that followed Rev. Rul. 69-147, in determining their dividend or interest deductions on unmatured short-term savings certificates with respect to deposits made before January 1, 1971. Those organizations that wish to redetermine their dividend or interest deductions under this Revenue Ruling on such short-term savings certificates with respect to deposits made prior to January 1, 1971, may file an amended return or, if appropriate, a claim for refund (Form 843) for applicable open taxable years.