
    THE BUCKEYE SAVINGS AND LOAN COMPANY v. THE UNITED STATES
    [No. 415-59.
    Decided February 6, 1963.
    Plaintiff’s motion for reconsideration denied May 10, 1963]
    
      
      Numa L. Smith, Jr., and John M. Bixler for the plaintiff. Miller dk Chevalier was on the brief.
    
      Earl Huntington, with whom was Assistant Attorney General Louis F. Oberdorfer, for the defendant. Edward S. Smith, Lyle M. Turner, Philip B. Miller and John F. Palmer were on the brief.
   JoNes, Chief Judge,

delivered the opinion of the court:

This is a suit for the refund of income taxes in the aggregate sum of $43,040.08, which plaintiff claims as an overpayment of income taxes paid by it for the calendar years 1954 through 1957.

The plaintiff is a domestic building and loan association which was chartered under the laws of the State of Ohio in 1890. It is subject to regulation under Ohio law and to supervision by Ohio State authorities. The plaintiff is a member of the Federal Home Loan Bank System.

Prior to the enactment of the Bevenue Act of 1951, which became effective as of January 1,1952, building and loan associations were exempt from Federal income taxes. This act removed the exemption and made these associations subject to income tax, but in doing so included section 313 which is practically the same provision as section 593 of the Internal Revenue Code of 1954 (26 U.S.C. § 593 (1958)). This section grants liberal bad debt deductions to domestic building and loan associations. This special concession was apparently extended to these previously tax-exempt institutions in order to afford them an opportunity to make adequate provision against possible losses.

Under another provision of the 1954 Code, section 166 (26 U.S.C. § 166 (1958)), which is of general application, a taxpayer may deduct any debt which becomes worthless within the taxable year, or, in the alternative, it may deduct a “reasonable addition” to a reserve for bad debts, as determined by the Secretary or his delegate.

Section 593 provides that this “reasonable addition” to a reserve for bad debts under section 166(c), in the case of savings institutions of the type named therein, shall be determined with due regard to the taxpayer’s surplus or bad debt reserves existing at the close of December 31, 1951.

Section 593 also confers upon a savings institution the right to determine for itself a reasonable addition for the taxable year, so long as such amount determined by it does not exceed the amount derived from the following formula:

(2) the amount by which 12 percent of the total deposits or withdrawable accounts of its depositors at the close of such year exceeds the sum of its surplus, undivided profits, and reserves at the beginning of the taxable year.

In 1955 plaintiff paid Federal income taxes for 1954 in the amount of $116,455; in 1956 it paid $126,899 for 1955, and in 1957, $133,059 for 1956. Being a cash basis taxpayer, it did not show these sums as accrued liabilities on its year-end statements for the respective years in which they were accrued.

Plaintiff claimed, under section 593, in its income tax returns for each of the years 1954 through 1957 additions to its reserve for bad debts in the amounts of $12,509.55, $21,046.88, $20,847.75, and $20,423.39, respectively. The Commissioner of Internal Revenue disallowed all of these claims and assessed deficiencies in the amount of $43,040.08, which plaintiff paid. After its claims for refunds were rejected, plaintiff brought this suit.

The issue before us is whether all or a part of these additions to plaintiff’s bad debt reserves are allowable as deductions from its taxable income under the formula of section 593, or, if not so allowable, whether, in the alternative, they should nevertheless be allowed under the broad discretionary authority given the Secretary or his delegate in section 166(c) of the 1954 Code. The question of additions under the formula of section 593, in the posture the case has assumed before us, depends upon the amount of plaintiff’s “surplus, undivided profits, and reserves” on January 1 of each of the respective years at issue. The pertinent Treasury regulation provides that “surplus, undivided profits, and reserves” is the amount by which total assets exceed total liabilities and permanent nonwithdrawable paid-in capital stock.

In its operations plaintiff had issued $800,000 par value in withdrawable shares, of which $400,000 par value was paid for with cash and $400,000 par value was issued as a dividend declared on May 8,1950, to holders of withdrawable shares of record on that date. These stock issues are not involved here. While taking a somewhat broader position in its brief, the defendant conceded in oral argument that these stock issues are no longer in issue.

In December 1951 the plaintiff issued $400,000 par value in permanent nonwithdrawable stock. This was issued as a stock dividend declared on December 17, 1951, to holders of withdrawable shares of record on December 15, 1951. This dividend was declared while savings and loan associations were still untaxable and before the law in question went into effect.

Plaintiff contends that its $400,000 par value permanent nonwithdrawable capital stock issued as a stock dividend is not a part of surplus, undivided profits, and reserves. It also contends that the amount of its accrued Federal income taxes on December 31 of each year should be deducted from its surplus account on January 1 of the subsequent year for the purpose of determining tax-free additions to its bad debt reserve during that year under the formula of section 593.

As shown in Column H of Table I, herein, plaintiff is entitled to all of the deductions taken during the years at issue if it is correct in its contention that both its $400,000 par value nonwithdrawable capital stock issued as a stock dividend and its accrued income taxes were not a part of its surplus, undivided profits, and reserves on January 1 of each of the respective years. On the other hand, if it is correct only in respect to its $400,000 par value nonwithdrawable capital stock, it is entitled to its additions for the years 1954 through 1956, but not for the year 1957, as shown in Column K of Table I. Defendant takes the position that both the $400,000 par value nonwithdrawable capital stock and the accrued taxes were a part of surplus, undivided profits, and reserves and that, as a consequence, under the formula of section 593, plaintiff is entitled to no additions to its reserves during the years in question, as shown in Column G of Table II.

Alternatively, if found not to be entitled to additions to its bad debt reserve under the formula of section 593, plaintiff argues that it is nevertheless entitled to the additions ■claimed under section 166(c) of the 1954 Code.

Since, as Table I indicates, the years 1954, 1955, and 1956 are unaffected by the treatment of plaintiff’s accrued income taxes if the $400,000 nonwithdrawable capital stock is not treated as a part of surplus, the principal issue for those years is whether the $400,000 par value nonwithdrawable stock that was transferred to the capital account is to be included in surplus for purposes of section 593. The Commissioner of Internal Revenue claims that it should be so included. Such inclusion would reduce the difference between the surplus, undivided profits, and reserves and 12 percent of the total deposits. If so classified the effect would be to increase the income tax payable for the years involved, since plaintiff’s additions to its reserve would be subject to the income tax. On the other hand, if the $400,000 of permanent nonwithdrawable stock dividend has become capital and is no longer a part of the surplus, undivided profits, and reserves the taxpayer would be favored by thus increasing the difference between that figure and 12 percent of the total deposits or withdrawable accounts.

We believe that when the transfer was made to the permanent nonwithdrawable stock that particular amount was no longer a part of the surplus, undivided profits, and reserves, but became a part of the capital structure.

The declaration of a stock dividend is simply a method of ■capitalizing and not of distributing accumulated profits. It is accomplished by a charge against or a withdrawal from the surplus account and a resultant credit to the capital account accompanied by issuance of new stock to stockholders .in proportion to their previous holdings.

When a stock dividend is declared, the stockholders receive nothing from the assets and the transferred sum '“remains the property of the company, and subject to business risks which may result in wiping out the entire investment.”

To use a simple illustration: If a building and loan association bad $100,000 in surplus, $20,000 in undivided profits, and $20,000 in reserves and should decide that it wished to become an association with capital stock and should transfer $20,000 to permanent nonwithdrawable stock and declare the same as a stock dividend, it would necessarily reduce the total amount of surplus, undivided profits, and reserves by the sum of $20,000. In other words, that $20,000 would no longer be a part of the surplus, undivided profits, and reserves. This seems to be the ordinary everyday meaning of the words used by the statute, and to give them that meaning is a firmly established principle of statutory interpretation.

Defendant contends that when the Congress enacted section 593 it thought that it was dealing with purely mutual type savings associations without capital stock and that for this reason plaintiff’s prior capitalization of surplus should not be recognized as reducing surplus for purposes of section 593. On the contrary, we believe that the Congress recognized that domestic building and loan associations might be stock associations since the qualifying phrases “not having capital stock represented by shares” or “without capital stock” were not applied to building and loan associations, where specifically mentioned, as they were to the other savings institutions covered by section 593.

Defendant further asserts that, in any event, plaintiff’s nonwithdrawable capital stock should not be recognized as a transfer from surplus for tax purposes because a dividend “is in no sense a distribution of surplus.” A stock dividend, it points out, does not alter the proportionate interest of any stockholder or increase the intrinsic value of his holdings, the new certificates issued as a result of the transfer representing simply an increase in the number of shares.

Moreover, defendant argues, section 312(d) of the Internal Revenue Code of 1954 (26 U.S.C. § 312(d) (1958) ) specifically provides that a distribution by a corporation of its stock shall not be considered a distribution of the “earnings and profits” of the corporation if the distribution was not subject to income tax in the hands of the distributee by reason of section 305(a) (which provides that a stock dividend is ordinarily nontaxable as income to the recipient thereof) , Defendant maintains that, since plaintiff’s capital stock was derived from a stock dividend, and since that stock dividend was presumably not taxed as ordinary income of the stockholder, “earnings and profits” — and therefore “surplus, undivided profits, and reserves” — were not reduced by the distribution of the $400,000 par value in nonwithdrawable shares, at least not insofar as Federal income taxes are concerned.

We are of the opinion that the defendant errs in attempting to equate the statutory concept of “earnings and profits” as embodied in section 312(d) with the statutory concept of “surplus, undivided profits, and reserves” as used in section 593.

Section 593 was enacted to permit savings institutions to accumulate liberal bad debt reserves without having to pay income taxes on reasonable amounts annually dedicated to that purpose. Whether a stock dividend reduces the “surplus, undivided profits, and reserves” of an incorporated savings and loan association under section 593 is an entirely separate question from whether the same stock dividend reduces its “earnings and profits” under section 312(d). A stock dividend can be recognized as reducing surplus for purposes of section 593 without in any way impinging upon the statutory requirement that it shall not be recognized as a reduction of “earnings and profits” for purposes of section 312(d). In the absence of specific congressional direction to the contrary, whether previous bona fide reductions of surplus by means of tax-free dividends were or were not taxed to their recipients can have no effect on the fact of its actual reduction so far as section 593 is concerned. Defendant’s taxability test, i.e., that distributions of surplus will be recognized only if taxed in the hands of the recipients thereof, therefore has no application to the determination of “surplus, undivided profits, and reserves” in the case at bar.

Defendant fails to recognize that a stock dividend may be one thing from the point of view of the recipient and quite a different thing from the point of view of the issuing corporation. Since we are concerned here with the taxability of the current income of the corporation itself, the legal significance of its stock dividend, as to it, is to be determined entirely from the standpoint of its effect on the plaintiff’s corporate structure. From the point of view of the stockholder he may receive no more than what is already his, but from the point of view of the corporation — an entity entirely separate from its stockholders — a stock dividend capitalizes that portion of the accumulated income so distributed with definite legal consequences to the corporation. As to the corporation itself, a stock dividend ordinarily becomes a part of its legal capital. It is the same as if accumulated profits distributed to the shareholders in cash were received back from them in equal amounts as paid-in additional investments in the corporation. As the court said in Trefry v. Putnam, 227 Mass. 522, 535, 116 N. E. 904, 911 (1917):

In essence the thing which has been done [a stock dividend] is to distribute a symbol representing an accumulation of profits, which instead of being paid out in cash is invested in the business * * * [T]he substance of the transaction is no different from what it would be if a cash dividend had been declared with the privilege of subscription to an equivalent amount of new shares.

Under the law of Ohio, state of plaintiff’s incorporation, stated capital (which term is used instead of “capital,” “capital stock,” or “paid-in capital”) may be increased by a transfer from any surplus however created by order of the directors or upon payment of dividends in shares of stock.

Thus, a stock dividend, under Ohio law, becomes an indistinguishable part of stated capital and therefore legal capital. Since surplus (from whatever source and including reserves) is defined as the excess of assets over liabilities and stated or legal capital, it is clear that under Ohio law and modern usage the par value of stock arising from a stock dividend would be subtracted from assets in determining the amount of surplus available to a corporation on its statement date.

Defendant argues that, nevertheless, plaintiff’s $400,000 nonwithdrawable shares of capital stock cannot be recognized as a part of its legal capital because it was not “paid-in” within the meaning of section 1.593-1 (d) (2) (iii) of the Treasury regulation promulgated pursuant to section 593.

That section of the Treasury regulations expressly recognizes that capital stock is not a part of surplus, undivided profits, and reserves but attempts to qualify such recognition with the provision that “[i]n the case of a building and loan association having permanent nonwithdrawable capital stock represented by shares, the paid-in amount of such stock shall be considered a liability.” [Emphasis supplied.] According to defendant’s interpretation of this regulation, a stock dividend cannot be paid-in stock. Paid-in stock, it asserts, is stock purchased with funds from sources outside the corporation itself and hence is exclusive of a stock dividend.

We do not believe the statutory language of section 593 authorizes the use of the words “paid-in” in this context. As defendant construes the regulation, it would go beyond the statute. The law is embodied in the statute and not in the interpretative regulation thereof. Plaintiff is required by the statutory formula of section 593 merely to determine its “surplus, undivided profits, and reserves” as of the beginning of the taxable year. If defendant is permitted to modify the statutory language with the requirement that capital stock be “paid-in” and then to interpret “paid-in” as excluding payment by transfers from surplus accounts within the corporation, thereby denying plaintiff’s nonwithdrawable shares recognition as stated or legal capital and not deductible from assets in determining “surplus, undivided profits, and reserves,” the effect is to subject plaintiff to rules of corporation law not recognized either by Ohio law or by general corporation law — and without a clear mandate from the Congress. We would avoid such an erroneous result by reading the Treasury regulation where it refers to “paid-in” stock as “stated” or “legal” capital, and we hold that it should be so read.

In summary, we think it must be assumed that the Congress, in enacting section 593, was cognizant of the fact that the collective accounts called “surplus, undivided profits, and reserves” are not stable elements on corporate balance sheets; that they can be, and frequently are, reduced for legitimate corporate purposes. So far as application of the formula in section 593 is concerned, it is evident from the wording of that section that the Congress intended the effect of a dividend payment to be the same on all incorporated savings and loan associations, whether paid in cash or in stock, at least as to those payments made prior to December 31, 1951. We therefore conclude that, since reductions in surplus to pay cash dividends are unquestionably reductions of the statutory amounts of “surplus, undivided profits, and reserves” involved in this case, a reduction of surplus (accumulated earnings) for the purpose of a stock dividend, where that dividend is irrevocably dedicated to the corporation’s stated or legal capital, shall also be considered a reduction of the statutory “surplus, undivided profits, and reserves.” The Tenth Circuit in a well reasoned opinion reaches the same conclusion on similar facts. [United States v. Zions Savings and Loan Assn., supra, note 8.]

Plaintiff is therefore entitled to all of the deductions taken for additions to its bad debt reserve, unless, in regard to the year 1957, its deduction from surplus of Federal income taxes accrued during 1956 must be disallowed. (See Table I, Columns H and K.)

Plaintiff, relying on the regulation’s definition of “total liabilities” as beng “all liabilities of the taxpayer which are fixed and determined, absolute and not contingent, and includes those items which constitute liabilities in the sense of debts or obligations,” contends that its accrued Federal income taxes on January 1 for each of the years 1955,1956, and 1957 must be treated as a liability on those dates and used to reduce its “surplus, undivided profits, and reserves” otherwise shown on those dates. The Commissioner of Internal Revenue has rejected this method of accounting, presumably on the ground that in Ms opinion such a method of accounting by a cash basis taxpayer does not clearly reflect income.

We are in agreement with this position. Such an accrued liability is inconsistent with the cash method and does not, in fact, truthfully reflect income. We conclude that plaintiff’s proposed method of treating its Federal income taxes is improper and the regulations may not be so interpreted as to permit it. Reference to Column K of Table I indicates that even with the disallowance of its claimed deductions for accrued taxes for the years 1954 through 1956 its surplus, ■undivided profits, and reserves are still less than 12 percent of deposits or withdrawable accounts by a greater amount than its additions to bad debt reserves. For those years its additions to bad debt reserves are therefore allowable as deductions from income. But for the year 1957 there was no excess above the designated 12 percent, but rather a deficit, with the result that under the formula of section 593 plaintiff’s addition to its bad debt reserve for that year must be disallowed as a deduction from taxable income.

As to the year 1957, there remains for us to consider plaintiff’s alternative ground that its additions are reasonable and hence deductible under the general provisions of section 166(c) of the Code. Section 593 of the Code and section 1.593-2 of the regulations provide that, to the oxtent the formula provision is inapplicable, the Secretary (or his delegate) may allow a deduction for a reasonable addition to a reserve for bad debts.

As we have seen, neither this court nor the Commissioner •of Internal Revenue has found that plaintiff is entitled to make an addition to its bad debt reserve in the year 1957. The latter has likewise refused to allow the claimed addition under the broad discretionary power conferred upon the 'Secretary or his delegate in section 166 (c).

The legislative enactment makes it clear that the discretion to determine what is a reasonable addition to the bad debt reserve of a savings and loan association over and above what it is entitled to under the formula of section 593 is ■conferred upon the administrative agency, not upon the court. We find no substantial basis for a finding of arbitrary •action by the Commissioner, and we therefore consider it our proper function to accept as final the administrative determination as to the year 1957, disallowing plaintiff’s claimed addition to its bad debt reserve. The Commissioner acted in conformity with the statute, and a challenge to his discretion raises no question of law.

Whenever a statute gives a discretionary power to any person, to be exercised by him upon his own opinion of certain facts, it is a sound rule of construction, that the statute constitutes him the sole and exclusive judge of the existence of those facts.

Accordingly, plaintiff is entitled to recover the amounts of $7,815.58, $12,492.78, and $11,724.13 for the years 1954, 1955, and 1956, respectively, together with interest as provided by law, and judgment is entered to that effect. As to the claim for the year 1957, the petition is dismissed.

Davis, Judge; DuRfee, Judge; Lakamoee, Judge; and Whitakek, Judge, concur.

FINDINGS OF FACT

The court, having considered the evidence, the report of Trial Commissioner Mastín G. White, and the briefs and argument of counsel, makes findings of fact as follows:

1. The Buckeye Savings and Loan Company, which is the plaintiff in this action and will usually be referred to hereafter in the findings as “the plaintiff,” is a corporation that was chartered under the laws of the State of Ohio in 1890. Since then, the plaintiff has maintained its home office and principal place of business at Bellaire, Ohio.

2. The plaintiff is a domestic building and loan association, within the meaning of that term as used in section 7701(a) (19) of the Internal Revenue Code of 1954.

3. The plaintiff is subject to regulation under Ohio law and to supervision by Ohio State authorities. During the years that are involved in the present litigation, the plaintiff operated under Chapter 1151 of the Revised Code of Ohio, which relates to building and loan associations and savings associations.

4. The plaintiff is a member of the Federal Home Loan Bank System.

5. The plaintiff filed its income tax return for each of the years 1954 through 1957 with the District Director of Internal Revenue at Cleveland, Ohio, and made timely payment of the taxes shown as due thereon. It kept its books and filed its tax returns for those years on the cash basis of accounting.

6. The plaintiff claimed the following additions to its reserve for bad debts as deductions in computing the taxable income shown in its income tax returns for the years 1952 through 1957:

1952 _$17,068.63
1953 _ 15, 854. 81
1954 _ 12, 509. 55
1955 _ 21, 046. 88
1956 _ 20, 847.75
1957 _ 20,423.39

7.(a) The Commissioner of Internal Revenue disallowed the deductions referred to in finding 6 for the years 1954-1957, inclusive. The deficiencies for such years resulting from such disallowances, and the interest thereon, are indicated in the following table:

Deficiencies Interest
1954 -$6, 504. 97 $1,310. 61
1955 _ 10, 944.38 1, 548.40
1956 - 10, 840.83 883.30
1957 - 10, 620.17 387.42

The plaintiff paid the deficiencies for 1954 through 1956, plus interest thereon, on August 27,1958, and the deficiency asserted for the year 1957, plus interest thereon, on November 12, 1958.

(b) The plaintiff filed with the Internal Eevenue Service timely claims for the refund of alleged overpayments in the amounts of the deficiencies and interest mentioned in paragraph (a) of this finding. Each claim stated that:

The addition [to plaintiff’s bad debt reserve] was made pursuant to State statute and was a reasonable and allowable addition to the taxpayer’s reserve for bad debts.

These claims were rejected by the Commissioner of Internal Eevenue on May 20,1959.

(c) The petition was filed with this court on September 30, 1959.

8. (a) The plaintiff is a stock association. On December 31, 1951, and during the years 1954-1957, inclusive, it had outstanding: (1) $400,000 par value in permanent nonwith-drawable stock, which was issued as a dividend declared on December 17, 1951, to holders of withdrawable shares of record on December 15,1951; and (2) $800,000 par value in withdrawable shares, of which $400,000 par value was paid for with cash and $400,000 par value was issued as a dividend declared on May 8, 1950, to holders of withdrawable shares of record on that date.

(b) At the times when the stock dividends were issued by the plaintiff in 1950 and 1951, Ohio law provided that a building and loan association’s undivided profits should not exceed 5 percent of the association’s total assets. At the times mentioned, the plaintiff’s undivided profits exceeded 5 percent of its assets.

(c) In early December of 1951, an amendment to the plaintiff’s by-laws was adopted as a new Section 18A, pertaining to permanent stock. Section 18A reads as follows:

Permanent Stock of the par value of $100.00 per share may be issued, which shall constitute the permanent capital of this Company, and cannot be withdrawn until final dissolution of the Company.

9.On January 1 of each of the years 1954 through 1957, the plaintiff’s total assets were as follows:

1954 $19, 540,413.49
1955 20, 612,107.91
1956 21,258, 709.62
1957 22,296,336. 80

10.(a) The plaintiff’s total deposits on December 31 of each of the years 1951-1957, inclusive, were as follows:

1951_$14, 618,319.12
1952 _ 15, 003,270.90
1953 _ 16,251,932.27
1954 _ 17, 040,777.04
1955 _ 17, 775, 012.46
1956 _ 18, 680, 888.86
1957 _ 18,771,783.40

(b) The figures set out in paragraph (a) of this finding do not include the plaintiff’s withdrawable shares, with an aggregate par value of $800,000 on December 31 of each of the years 1951-1957.

11.(a) At all pertinent times, Section 26 of the plaintiff’s by-laws was designated as the “General Withdrawal Rule” and provided as follows:

Members and depositors whose deposits are not pledged to this Company may as a general rule, upon written application to the Secretary, withdraw all or any part of their credits or deposits at any time without previous notice, and such withdrawal shall be from the newest deposits, but to protect the interests of depositors and borrowers and avoid sacrifice of securities, notices of withdrawal may at any time be required and the right to interest on deposits shall cease with any application to withdraw. All persons withdrawing shall be entitled to receive the amount of all credits at the time of the application to withdraw. The required notices to withdraw shall be filed in the order in which they are received and paid from the regular receipts of the Company in the order in which they are filed, as far as fifty percent of the regular receipts of the Company will pay them; but the Board of Directors may at its discretion use all the regular receipts of the Company to pay withdrawals. All such withdrawals shall be taken from the oldest deposits and no withdrawals from any one account or certificate shall exceed one thousand dollars in each thirty days ahead of other pending applications for withdrawals; but the Board of Directors may, at its discretion, pay withdrawals not exceeding $25 at any time, nor exceeding $100 within thirty days, regardless of the order of application.

(b) At all pertinent times, the plaintiff’s withdrawable shares were regarded by the plaintiff as being as freely and fully withdrawable as deposits.

12. On January 1 of each of the years 1952-1957, inclusive, the plaintiff’s undivided profits and reserves were shown by its books of account to be as follows:

13. The plaintiff kept its books and filed its income tax returns on the cash receipts and disbursements method of accounting. Because of its method of accounting, the plaintiff’s books of account and its financial statements as of January 1 of each of the years 1955-1957 did not show the plaintiff’s Federal income tax liability for the respective preceding years. In 1955, the plaintiff paid a total of $116,-455 as Federal income tax for the year 1954; in 1956, the plaintiff paid a total of $126,899 for the year 1955; and in 1957, the plaintiff paid a total of $183,059 for the year 1956.

14.At all pertinent times, the plaintiff was on the reserve method of accounting for bad debts, both for book and income tax purposes. Its taxable income for income tax purposes for each of the years 1954 — 1957, inclusive, before any deduction for additions to its bad debt reserve, is shown in the following table:

1954_$247,037.69
1955_ 281,372.05
1956_ 300,774.01
1957_ 282, 820. 77

15. (a) Bellaire, Ohio, the site of the plaintiff’s home office and principal place of business, is located in the southern part of Ohio and on the Ohio Biver, about 3 miles south of Wheeling, West Virginia. The plaintiff serves the territory in West Virginia and Ohio surrounding Bellaire, up to a distance of about 50 miles from that town. It also does business in the following West Virginia towns that are more than 50 miles from Bellaire: Charleston, Clarksburg, Fair-mont, Huntington, and Parkersburg.

(b) Approximately 90 percent of the plaintiff’s loans are made to West Virginia borrowers and are secured by mortgages on West Virginia property.

16. The area served by the plaintiff does not have a stable economy. The population of Bellaire, Ohio, where the plaintiff’s home office is located, has declined in recent years from about 16,000 to about 12,000 persons.

17. The plaintiff’s percentage of loan delinquencies has consistently been greater than the average for all savings and loan associations in the State of Ohio.

18. The plaintiff is not, and during the period involved in this litigation it was not, a member of the Federal Savings and Loan Insurance Corporation; and its deposits and with-drawable accounts and shares are not, and during the period in issue were not, insured either by that corporation or otherwise. The plaintiff’s legal reserves have constituted the •only protection in the nature of insurance which the plaintiff has had for its depositors and the holders of its withdrawable shares.

19.For the years 1954r-195T, inclusive, the proportions of the total deposits and withdrawable accounts for all savings and loan associations held by insured savings and loan associations (i.e., members of the Federal Savings and Loan Insurance Corporation) were as follows:

1954. 90%
1955. 91%
1956. 92%
1957. 93%

Of the total deposits and withdrawable accounts for such years held by insured associations, the following proportions were insured:

1954_96. 8%
1955_96. 3%
1956_96. 3%
1957_96.3%

20. In addition to the plaintiff, there are four other financial institutions in Bellaire, Ohio: three banks and one building and loan association. The deposits and withdrawable accounts of each of these institutions are insured. The banks have insurance with the Federal Deposit Insurance Corporation, and the building and loan association has insurance with the Federal Savings and Loan Insurance Corporation. There are no uninsured building and loan associations in the immediate area which the plaintiff serves, other than the plaintiff itself.

21. (a) The plaintiff’s principal business has been — and it was during the years 1954-1957, inclusive — the making of loans secured by real estate mortgages. Its total loans, its FHA and GI loans, and its uninsured loans (i.e., loans not insured by the Federal Housing Administration or guaranteed by the Veterans Administration), were as follows for the years 1928-1957, inclusive:

(b) The plaintiff has made only one FHA. loan during-its existence, but has made more than its share of GI loans, as compared with the other financial institutions with which it competes.

22. During the years 1930 through 1957, the plaintiff acquired from 900 to 1,000 pieces of real estate by way of foreclosure. The peak in the number of pieces of real estate so acquired was reached in the middle 1930’s. At that time, foreclosed real estate represented approximately 20 percent of the plaintiff’s assets (from $900,000 to $1,000,000 in balance sheet value). At least half of the properties so acquired were held for 5 years or more, and approximately 15 percent was held for 10 years or more.

23. When it acquired real estate through foreclosure, it was the plaintiff’s practice to put it in condition for sale, and then try to sell it. If a reasonably prompt sale of the real estate was not possible, the property was rented until it could be sold. From 1930 through 1957, the plaintiff lost between $150,000 and $200,00 in connection with the rental of foreclosed real estate. These losses, which reflected the plaintiff’s costs of renovating and maintaining acquired real estate, were charged off as costs of operation. They were not charged against the plaintiff’s reserve.

24. The losses charged against and the amounts credited as recoveries to the plaintiff’s reserve, and the plaintiff’s profit on the sale of repossessed real estate, for the years. 1928-1957, inclusive, were as follows:

The amounts shown under the caption “Profit on sale of real estate repossessed” in this table were taken from the plaintiff’s books as they existed at the close of each year. These amounts contain a duplication of certain figures in the aggregate amount of $200,273.68. The duplication results from transfers between accounts, as required by Ohio ■supervisory authorities. The total of the profits shown should, therefore, be reduced by the amount of $200,273.68.

25. Under Section 1151.50 of Chapter 1151 of the Revised Code of Ohio and predecessor laws, the plaintiff was required to set aside 5 percent of its net income as a reserve against losses. For the years 1928-1951, inclusive, the amounts required to be set aside in such reserve by Ohio law (5 percent of net earnings), the amounts actually set aside in such reserve by the plaintiff, and the total reserves as of January 1, were as follows:

26. The additions which the plaintiff made to its reserve for bad debts during the years 1952 through 1957 were required by Section 1151.50 of the Eevised Code of Ohio. These amounts, the amounts credited to the reserve as recoveries, and the amounts claimed by the plaintiff as deductions on its income tax returns for the years mentioned, were as follows:

27. (a) For the years 1954-1957, inclusive, the proportions of net incomes, before Federal income taxes, transferred to reserves by the plaintiff, by all associations that were members of the Federal Home Loan Bank System, and by all such member associations having assets between $10,000,000 and $25,000,000, were as follows:

(b) For the years 1954 — 1957, inclusive, the plaintiff’s assets represented the following proportions of the total assets of all member associations having assets between $10,000,000 and $25,000,000, and the Federal income tax paid by the plaintiff in each of those years (not including deficiencies paid) represented the following proportions of the total Federal income taxes paid by all member associations having assets between $10,000,000 and $25,000,000:

CONCLUSION 03? LAW

Upon the foregoing findings of fact, which are made a part of the judgment herein, the court concludes as a matter of law that plaintiff is entitled to recover seven thousand eight hundred fifteen dollars and fifty-eight cents ($7,815.58) for the year 1954, twelve thousand four hundred ninety-two dollars and seventy-eight cents ($12,492.78) for the year 1955, and eleven thousand seven hundred twenty-four dollars and thirteen cents ($11,724.13) for the year 1956, together with interest as provided by law, and judgment is entered to that effect.

Plaintiff is not entitled to recover for the year 1957 and as to that portion of its claim the petition is dismissed. 
      
       Ch. 521, § 313, 65 Stat. 452, 490. Subsections (a) and (b) repeal section 101 (2), (4) of the Internal Revenue Act of 1939 (relating to exemption from tax of mutual savings banks, building and loan associations, and cooperative banks). Subsection (e) contains the formula now appearing as section 593 of the 1954 Code, appearing as an amendment of section 23(k)(1) of the former Code (relating to deduction from gross income of bad debts).
     
      
       “§ 593. Additions to reserve for bad debts.
      “In the case of a mutual savings bank not having capital stock represented by shares, a domestic building and loan association, and a cooperative bank without capital stock organized and operated for mutual purposes and without profit, the reasonable addition to a reserve for bad debts under section 166(c) shall be determined with due regard to the amount of the taxpayer’s surplus or bad debt reserves existing at the close of December 31, 1951. In the case of a taxpayer described in the preceding sentence, the reasonable addition to a reserve for bad debts for any taxable year shall in no case be less than the amount determined by the taxpayer as the reasonable addition for such year; except that the amount determined by the taxpayer under this sentence shall not be greater than the lesser of—
      “(1) the amount of its taxable income for the taxable year, computed without regard to this section, or
      “(2) the amount by which 12 percent of the total deposits or with-drawable accounts of its depositors at the close of such year exceeds the sum of its surplus, undivided profits, and reserves at-the beginning of the taxable year.”
     
      
       “§ 166. Bad debts.
      “(a) General rule.
      “(1) Wholly worthless debts.
      “There shali be allowed as a deduction any debt which becomes worthless within the taxable year.
      * # * * *
      “(c) Reserve for bad debts.
      “In lieu of any deduction under subsection (a), there shall be allowed (in the discretion of the Secretary or his delegate) a deduction for a reasonable addition to a reserve for bad debts.”
     
      
       Treas. Reg. 5 1.593-1(3)(2) (1956), which reads as follows:
      “(2) Surplus, undivided profits, and reserves.
      “(i) The phrase ‘surplus, undivided profits, and reserves’ means the amount by which the total assets of an institution exceed the amount of the total liabilities of such an institution.
      “(ii) For this purpose the term ‘total assets’ means the sum of money, plus the aggregate of the adjusted basis for determining gain upon sale or exchange for Federal income tax purposes. * » * The determination of the total assets of any taxpayer shall conform to the method of accounting employed by such taxpayer in determining taxable income and to the rules applicable in determining earnings and profits.
      “(ill) The term ‘total liabilities’ means all liabilities of the taxpayer, which are fixed and determined, absolute and not contingent, and includes those Items which constitute liabilities in the sense of debts or obligations. The total deposits or withdrawable accounts, as defined in subparagraph (3) of this paragraph, shall be considered a liability. In the case of a building and loan association having permanent nonwithdrawable capital stock represented by shares, the paid-in amount of such stock shall also be considered a liability. Reserves for contingencies and other reserves, however, which are mere appropriations of surplus, are not liabilities.”
     
      
       In early December of 1961, an amendment to tbe plaintiff’s by-laws was adopted as a new Section 18A, pertaining to permanent stock. Section 18A reads as follows:
      “Permanent Stock of tbe par value of $100.00 per share may be issued, wbicb shall constitute the permanent capital of this Company, and cannot be withdrawn until final dissolution of the Company.”
     
      
       Plaintifl’s balance sheet ior the year ended December 31, 1953, showed the sum of $91,000 as a “Reserve for Income Tax.” In Its brief, plaintiff also ■claims this as a liability on January 1, 1951; we therefore have included this amount as one of the liabilities to be considered in determining surplus, etc.
     
      
      
         Eisner v. Macomber, 252 U.S. 189, 211 (1920).
     
      
      
        United States v. Zions Savings and Loan Association, 313 F. 2d 331 (C.A. 10, 1963).
     
      
       Ballantine, Corporations 482 (rev. ed. 1946).
     
      
       26 U.S.C. § 312(d) (1958), which reads as follows:
      “§ 312. Effect on earnings and profits.
      * * * * *
      “(d) Certain distributions of stock and securities.
      
        “(1) In general.
      “The distribution to a distributee by or on behalf of a corporation of its stock or securities, of stock or securities in another corporation, or of property, in a distribution to which this Code applies, shall not be considered a distribution of the earnings and profits of any corporation—
      “(A) if no gain to such distributee from the receipt of such stock or securities, or property, was recognized under this Code, or
      “(B) if the distribution was not subject to tax in the hands of such distributee by reason of section 305(a).”
     
      
       26 U.S.C. § 305(a) (1958), which reads as follows:
      “§ 305. Distributions of stock and stock rights.
      “(a) General rule.
      “Except as provided in subsection (b), gross income does not include the amount of any distribution made by a corporation to its shareholders, with respect to the stock of such corporation, in its stock or in rights to acquire its stock.”
     
      
       Baldwin’s Ohio Rev. Code Ann. § 1701.30 (1958).
     
      
       Baldwin’s Ohio Rev. Code Ann. § 1701.82(A) (1958).
     
      
       See supra note 4.
     
      
       See supra note 4.
     
      
       Treas. Reg. § 1.593-2 (1958) reads as follows:
      “Where 12 percent of the total deposits or withdrawable accounts of an Institution at the close of the taxable year is equal to or less than the sum of such institution’s surplus, undivided profits, and reserves at the beginning of the taxable year, a reasonable addition to the reserve for bad debts as •determined under the general provisions of section 166(c) may be allowable -as a deduction from gross income.”
     
      
      
        United States v. George S. Bush & Co., 310 U.S. 371, 380 (1940).
     
      
      
        Martin v. Mott, 25 U.S. 19, 31 (1827).
     