1.593-10—Certain distributions to shareholders by a domestic building and loan association.
(a) In general.
Section 593(f) provides that if a domestic building and loan association (as defined in section 7701(a)(19) and the regulations thereunder) distributes property after December 31, 1962, to a shareholder with respect to its stock and if the amount of such distribution is not allowable to the association as a deduction under section 591 (relating to deduction for dividends paid on deposits), then, notwithstanding any other provision of the Code, the distribution shall be treated as provided in paragraphs (b) and (c) of this section. For purposes of the preceding sentence, the term distribution includes any distribution in redemption of stock to which section 302(a) or 303 applies, or in partial or complete liquidation of the association, as well as any other distribution which the association may make to a shareholder with respect to its stock. For definition of the term property, see section 317(a). For determination of the amount of a distribution, see section 301(b). For taxable years beginning after July 11, 1969, this paragraph is not applicable to any transaction to which section 381 (relating to carryovers in certain corporate acquisitions) and the regulations thereunder apply.
(b) Distributions out of certain reserves—
(1) Distributions not in exchange for stock.
If the distribution is not a redemption to which section 302(a) or 303 applies or in partial or complete liquidation of the association, then to the extent that the distribution is not out of earnings and profits of the taxable year (within the meaning of section 316(a)(2)) or out of earnings and profits accumulated in taxable years beginning after December 31, 1951, the distribution shall be treated as made out of:
(i)
First, the reserve for losses on qualifying real property loans (determined under subparagraph (3) of this paragraph), to the extent thereof,
(ii)
Second, the supplemental reserve for losses on loans, to the extent thereof, and
(iii)
Finally, such other accounts as may be proper.
(2) Distributions in redemption of stock or in liquidation.
If the distribution is a redemption to which section 302(a) or 303 applies, or in partial or complete liquidation of the association, the distribution shall be treated as made out of:
(i)
First, the reserve for losses on qualifying real property loans (as determined under subparagraph (3) of this paragraph), to the extent thereof,
(ii)
Second, the supplemental reserve for losses on loans, to the extent thereof,
(iii)
Third, earnings and profits of the taxable year (within the meaning of section 316(a)(2) ),
(iv)
Fourth, earnings and profits accumulated in taxable years beginning after December 31, 1951, and
(v)
Finally, such other accounts as may be proper.
(3) Special rule.
For purposes of subparagraphs (1)(i) and (2)(i) of this paragraph, the reserve for losses on qualifying real property loans shall be an amount equal to:
(i)
The balance of such reserve determined as of the close of the taxable year after all adjustments for such year have been made (including the addition for such year determined under § 1.593-6 or § 1.593-6A (whichever is applicable)), minus.
(a) The amount which would have constituted the opening balance of such reserve (at the close of December 31, 1962) if such opening balance had been determined under the experience method described in paragraph (b)(3)(ii)(b) of § 1.593-7 (relating to allocation of pre-1963 reserves to the opening balance of the reserve for losses on qualifying real property loans), and
(b) The total amount of the annual additions which would have been made to such reserve under section 166(c) for taxable years ending after December 31, 1962, if each such addition had been determined under the experience method described in paragraph (d) of § 1.593-6 or paragraph (d) of § 1.593-6A, whichever is applicable for the taxable year of such addition.
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For purposes of subdivision (i) of this subparagraph, the balance of the reserve for losses on qualifying real property loans shall include the total amount of any pre-1963 reserves allocated thereto under paragraph (b)(3) of § 1.593-7
, but shall not include any pre-1952 surplus which is deemed to be included therein under paragraph (a) of § 1.593-8
(relating to allocation of pre-1952 surplus to the opening balance of the reserve for losses on qualifying real property loans).
(c) Amount charged against reserve and included in gross income—
(1) In general.
If a distribution is treated under paragraph (b) (1) or (2) of this section as having been made out of the reserve for losses on qualifying real property loans or out of the supplemental reserve for losses on loans, such reserves shall be charged with, and gross income for the taxable year shall be increased by, an amount equal to the lesser of:
(i)
The amount of such reserves, or
(ii)
The amount which, when reduced by the amount of income tax imposed by chapter 1 of the Code and attributable to the inclusion of such amount in gross income, is equal to the amount of such distribution.
(2) Special rule.
For purposes of subparagraph (1)(ii) of this paragraph, in determining the income tax attributable to the inclusion of an amount in gross income, taxable income shall be determined without regard to any net operating loss carryback to the taxable year under section 172.
(d) Examples.
This section may be illustrated by the following examples:
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Example 1.
(i) Facts. X Corporation, a domestic building and loan association having nonwithdrawable capital stock represented by shares, was organized in 1946, and makes its returns on the basis of the calendar year and the reserve method of accounting for bad debts. As of the close of December 31, 1962, X had $6,900 of earnings and profitsaccumulated in taxable years beginning after December 31, 1951. X's taxable income for 1963 is $30,000 (computed prior to the inclusion of any amount in gross income for such year under section 593(f)) and during such year X received tax-exempt interest of $500. X's earnings and profits for 1963 (computed at the close of the taxable year without diminution by reason of any distributions made during the taxable year) is $20,400. The opening balance of X's reserve for losses on qualifying real property loans as of the close of December 31, 1962 (determined under paragraph (b)(3)(ii)(a) of § 1.593-7
) was $24,500. Pre-1963 reserves of $22,500 were included in such opening balance, but it is assumed that pre-1963 reserves of only $2,500 would have been included in the opening balance if the opening balance had been determined under the experience method described in paragraph (b)(3)(ii)(b) of § 1.593-7
. Pre-1952 surplus of $2,000 was deemed included in such opening balance under paragraph (a) of § 1.593-8
. The deductible addition to such reserve for 1963 is $47,000. It is assumed that the addition to such reserve for 1963 would have been $2,200 if such addition had been computed under the experience method described in paragraph (d) of § 1.593-6
. On each of four dates during 1963 (January 1, April 1, July 1, and October 1), X made a $12,000 distribution (which was not a redemption to which section 302(a) or 303 applied or in partial or complete liquidation of X) to its shareholders with respect to its stock.
(ii) Reserve for losses on qualifying real property loans. For purposes of paragraph (b)(1)(i) of this section, X's reserve for losses on qualifying real property loans is $64,800, computed as follows:
| Closing balance of reserve for losses on qualifying real property loans after addition for 1963 ($24,500 opening balance plus $47,000 addition) |
$71,500 |
| Minus: |
| Amount of pre-1963 reserves which would have been included in opening balance under experience method |
2,500 |
| Total additions which would have been made under experience method |
2,200 |
| Pre-1952 surplus included in opening balance |
2,000 |
|
|
6,700 |
|
|
64,800 |
(iii) Treatment of distributions. Of each $12,000 quarterly distribution, $5,100 ($20,400) earnings and profits of the taxable year divided by 4) is out of X's earnings and profits of the taxable year (within the meaning of section 316(a)(2)); the remainder of the January 1 distribution, $6,900 ($12,000 minus $5,100), is out of X's earnings andprofits accumulated in taxable years beginning after December 31, 1951. Since $20,700 ($6,900 multiplied by 3) is not out of X's earnings and profits, such amount shall be treated as made out of X's reserve for losses on qualifying real property loans (as determined under subdivision (ii) of this example).
(iv) Amount charged against reserve for losses on qualifying real property loans and included in gross income. The reserve for losses on qualifying real property loans is charged with, and X's gross income for 1963 is increased by, $43,124, which is the lesser of:
(a) $64,800 (the reserve as of December 31, 1963, as determined under subdivision (ii) of this example), or
(b) $43,124, i.e., the amount which, when reduced by the amount of income tax attributable to the inclusion of such amount in gross income, $22,424 ($43,124 multiplied by a tax rate of 52 percent), is equal to the amount of such distribution, $20,700.
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Example 2.
(i) Facts. Assume the same facts as in example 1 and the following additional facts: X's taxable income for 1964 is $6,000. The deductible addition to the reserve for losses on qualifying real property loans for 1964 is $11,000, but it is assumed that only $2,676 would have been the addition to such reserve for 1964 if such addition had been computed under the experience method described in paragraph (d) of § 1.593-6
. On December 31, 1964, X makes a $10,000 distribution in a redemption to which section 302(a) applies.
(ii) Reserve for losses on qualifying real property loans. For purposes of paragraph (b)(2)(i) of this section, X's reserve for losses on qualifying real property loans is $30,000, computed as follows:
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| Closing balance of reserve for losses on qualifying real property loans after addition for 1964 ($71,500 opening balance plus $11,000 addition) |
$82,500 |
| Minus: |
| Amount of pre-1963 reserves which would have been included in opening balance under the experience method |
$2,500 |
| Total additions which would have been made under the experience method ($2,200 for 1963 plus $2,676 for 1964) |
4,876 |
| Pre-1952 surplus included in opening balance |
2,000 |
|
|
9,376 |
|
|
73,124 |
| Less charge against reserve under subdivision (iv) of example 1 for 1963 distribution |
|
43,124 |
|
|
30,000 |
(iii) Treatment of distribution. The $10,000 distribution in a redemption to which section 302(a) applies shall be treated as made out of X's reserve for losses on qualifying real property loans (as determined under subdivision (ii) of this example).
(iv) Amount charged against reserve for losses on qualifying real property loans and included in gross income. The reserve for losses on qualifying real property loans is charged with, and X's gross income for 1964 is increased by, $12,820, which is the lesser of:
(a) $30,000 (the reserve as of December 31, 1964, as determined under subdivision (ii) of this example), or
(b) $12,820, i.e., the amount which, when reduced by the amount of income tax attributable to the inclusion of such amount in gross income, $2,820 ($12,820 multiplied by a tax rate of 22 percent), is equal to the amount of such distribution, $10,000.
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Example 3.
(i) Facts. X Corporation, a domestic building and loan association having nonwithdrawable capital stock represented by shares, was organized in 1946, and makes its returns on the basis of the calendar year and the reserve method of accounting for bad debts. As of the close of December 31, 1962, X had $6,900 of earnings and profits accumulated in taxable years beginning after December 31, 1951. X's taxable income for 1963 is $30,000 (computed prior to the inclusion of any amount in gross income for such year under section 593(f)) and during such year X received tax-exempt interest of $500. X's earnings and profits for 1963 (computed at the close of the taxable year without diminution by reason of any distributions made during the taxable year) is $20,400. The opening balance of X's reserve for losses on qualifying real property loans as of theclose of December 31, 1962 (determined under paragraph (b)(3)(ii)(a) of § 1.593-7
) was $24,500. Pre-1963 reserves of $24,500 were included in such opening balance, but it is assumed that pre-1963 reserves of only $4,500 would have been included in the opening balance if the opening balance had been determined under the experience method described in paragraph (b)(3)(ii)(b) of § 1.593-7
. The deductible addition to such reserve for 1963 is $500. It is assumed that the addition to such reserve for 1963 would have been $100 if such addition had been computed under the experience method described in paragraph (d) of § 1.593-6
. As of December 31, 1963, the balance of X's supplemental reserve for losses on loans is $30,000. On each of four dates during 1963 (January 1, April 1, July 1, and October 1), X made a $12,000 distribution (which was not a redemption to which section 302(a) or 303 applied or in partial or complete liquidation of X) to its shareholders with respect to its stock.
(ii) Reserve for losses on qualifying real property loans. For purposes of paragraph (b)(1)(i) of this section, X's reserve for losses on qualifying real property loans is $20,400, computed as follows:
| Closing balance of reserve for losses on qualifying real property loans after addition for 1963 ($24,500 opening balance plus $500 addition) |
$25,000 |
| Minus: |
| Amount of pre-1963 reserves which would have been included in opening balance under experience method |
$4,500 |
| Total additions which would have been made under experience method |
100 |
|
|
4,600 |
|
|
20,400 |
(iii) Treatment of distributions. Of each $12,000 quarterly distribution, $5,100 ($20,400 earnings and profits of the taxable year divided by 4) is out of X's earnings and profits of the taxable year (within the meaning of section 316(a)(2)); the remainder of the January 1 distribution, $6,900 ($12,000 minus $5,100), is out of X's earnings and profits accumulated in taxable years beginning after December 31, 1951. Since $20,700 ($6,900 multiplied by 3) is not out of X's earnings and profits, $20,400 of such amount shall be treated as made outof X's reserve for losses on qualifying real property loans (as determined under subdivision (ii) of this example) and $300 ($20,700 minus $20,400) shall be treated as made out of X's supplemental reserve for losses on loans.
(iv) Amount included in gross income. X's gross income for 1963 is increased by $43,124, which is the lesser of:
(a) $50,400 ($20,400, the reserve for losses on qualifying real property loans, as determined under subdivision (ii) of this example, plus $30,000, the supplemental reserve for losses on loans), or
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(b) $43,124, i.e., the amount which, when reduced by the amount of income tax attributable to the inclusion of such amount in gross income, $22,424 ($43,124 multiplied by a tax rate of 52 percent), is equal to the amount of such distribution, $20,700.
(v) Amount charged against reserve for losses on qualifying real property loans and supplemental reserve for losses on loans. The reserve for losses on qualifying real property loans is charged with $20,400 (the balance of the reserve as of December 31, 1963, as determined under subdivision (ii) of this example), and the supplemental reserve for losses on loans is charged with $22,724 ($43,124, the amount included in gross income under subdivision (iv) of this example, minus $20,400).
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[T.D. 6728, 29 FR 5862, May 5, 1964, as amended by T.D. 549, 43 FR 21457, May 18, 1978]