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Frontier Savings Association v. Commissioner
United States Tax Court
87 T.C. 665 (1986)
Under federal law, savings-and-loan associations and mutual-savings banks that were members of district banks were obligated to maintain a certain level of stock ownership in the district bank. The stock-ownership requirements were determined at the end of a calendar year based on the outstanding home-mortgage loans and borrowings of each member bank. Based on their stock-ownership requirements at the end of the year, the member banks had until the end of January in the next calendar year to either purchase additional stock or request that excess shares they owned above the ownership requirement be redeemed by the district banks. Frontier Savings Association (Frontier) (plaintiff) was a member bank of the Federal Home Loan Bank of Chicago (the Chicago bank). In 1978 the Chicago bank decided to pay its annual dividend to its member banks in shares of stock in the Chicago bank. The Chicago bank noted its member banks could apply the stock dividend to the year’s stock-ownership requirement. Further, if the stock dividend placed a member bank above its ownership requirement, the Chicago bank had discretion to redeem excess shares and pay the redemption amount in cash. Although the Chicago bank had discretion to redeem the excess shares, it was not obligated to do so. Frontier did not have any stocks redeemed in 1978 or 1979 and did not pay taxes on its stock dividends for those years. The Commissioner of Internal Revenue (the Commissioner) (defendant) determined a deficiency against Frontier. Because the Chicago bank had discretion to redeem excess stock dividends for cash, the Commissioner argued, the member banks had a right to elect to have stock dividends redeemed for cash. Therefore, the member banks’ stock dividends were subject to taxation under § 305(b)(1) of the Internal Revenue Code. Frontier appealed.
Rule of Law
Holding and Reasoning (Swift, J.)
Concurrence (Hamblen, J.)
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