(b) The disallowance by the Commissioner of depreciation of $ 81.25 taken by the taxpayer on certain real estate; and (c) The action of the Commissioner in including in the taxpayer's income the amount of $ 6,181.88 and treating that amount as a dividend taxable at ordinary rates rather than at capital gain rates, as reported by the taxpayer in her return. Since the commencement of this action, the taxpayer has agreed to accept the Commissioner's determination in respect to the deficiencies resulting from the disallowances described in (a) and (b). The only issue, therefore, now submitted to the Court for decision is the action of the Commissioner as stated in (c).
Prior to 1941 the taxpayer purchased a one-half undivided interest in 125 shares of stock of Book No. 1794, Series 89 of the Lawndale Building and Loan Association (hereinafter referred to as 'Association'). These shares had a redemption value in 1945 of $ 25,000. Payments for these shares were to be made in monthly installments of $ 1.00 per single share. The Association was incorporated under the laws of Pennsylvania. The Association's by-laws provide in part as follows:
'Section 1. Shares of the association * * * may be issued either serially or non-serially and may be either installment shares, full-paid shares, prepaid shares, * * * or any other kind of shares which are now or may be hereafter authorized by law.
'Section 2. Each owner of installment shares shall pay as dues at or before each monthly meeting of the board of directors $ 1.00 per single share and $ 2.00 per double share.
* * * * * *
'Section 7. * * * upon withdrawal after one year and within two years from the date of issuance, the holder shall be entitled to twenty-five per centum of the earnings apportioned or credited thereon; * * * and after six years and prior to maturity, fifty per centum of such earnings.'
* * * * * *
'Section 2. Dividends on installment and prepaid shares shall be declared by the board of directors out of the undivided profits of the association. The basis for such dividends shall be the average amount, including dues and previously credited dividends, standing to the credit of each shareholder during the period since the date of the declaration of the previous dividend.
'Section 3. Cash dividends on full-paid shares shall be payable, out of the undivided profits of the association, * * * at such rate as the board of directors may determine; provided that, during any year, such rate shall not exceed the rate of dividends credited during such year to installment and prepaid shares.'
Under the Association's method of operation, an installment stockholder such as the taxpayer pays monthly 'dues' of $ 1.00 per share on the subscribed stock. When the payments made plus the 'previously credited dividends' on the installment shares of stock equals the par value of $ 200 per share, the stock matures and the proceeds then become unconditionally available to the subscriber for the stock. The 125 shares were issued November 1933 and matured May 1945, a period of 139 months. At maturity, the 'previously credited dividends' on the stock amounted to $ 7,625.00 computed as follows:
Total amount received:
125 share at $200.00 per
"Dues" paid to the Asso-
ciation on the 125 shares:
139 months at $1.00 per
Dividends previously credit-
ed to and paid in 1945 on
125 shares at $61.00
per share n1 $7,625.00
On the Series 89 stock, the 'dues' plus 'previously credited dividends' amounted to $ 192.01 per share for the 132-month period November 1933 to October 1944 and $ 7.99 per share for the 7-month period November 1944 to May 1945, totalling $ 200.00 per share.
In the year 1941, the taxpayer became the owner of the entire 125 shares of the aforesaid stock by acquisition from one Harry Fried, paying him the sum of $ 1,443.12 to acquire his interest in the undivided one-half of the Association's accumulated earnings attributable to the 125 shares of stock.
In 1945 the 125 shares of stock were redeemed by the Association and the taxpayer received from the Association the redemption value of $ 25,000. When the stock matured in 1945 the Association credited to the taxpayer the sum of $ 7,625.00 representing a distribution to her of Association earnings on her shares of stock. n2
Taxpayer filed her returns on a such basis and, hence the increments in value of the stock were never accrued by her in prior tax years. The Commissioner determined that taxpayer was accountable for only one-half of the accumulated 'previously credited dividends' on the stock in December 1941, during the period in which she owned only a one-half interest in the 125 shares of stock. In her 1945 return, taxpayer reported a long-term capital gain of $ 6,181.88 realized on the stock computed as follows:
B & L Stock
Lawndale B & L Association
The amount of dividend re-
ported as result of share
maturity is the sum of $7,625.00
From 11/8/33 to 12/31/41 this
taxpayer had a one-half in-
terest--the earning value of
the shares in 1941 amounted
This sum is deducted from the
gross income of $7,625 as
above resulting in $4,738.75
To this figure is added one-half
of earning value in 1941 of
Total long term capital
gain share maturity $6,181.88
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