[Code of Federal Regulations]
[Title 26, Volume 7]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.591-1]

[Page 342-343]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.591-1  Deduction for dividends paid on deposits.

    (a) In general. (1) In the case of a taxpayer described in paragraph 
(c)(1) or (2) of this section, whichever is applicable, there are 
allowed as deductions from gross income amounts which during the taxable 
year are paid to, or credited to the accounts of, depositors or holders 
of accounts as dividends or interest on their deposits or withdrawable 
accounts, if such amounts paid or credited are withdrawable on demand 
subject only to customary notice of intention to withdraw.
    (2) The deduction provided in section 591 is applicable to the 
taxable year in which amounts credited as dividends or interest become 
withdrawable by the depositor or holder of an account subject only to 
customary notice of intention to withdraw. Thus, amounts which, as of 
the last day of the taxable year, are credited as dividends or interest, 
but which are not withdrawable by depositors or holders of accounts 
until the following business day, are deductible under section 591 in 
the year subsequent to the taxable year in which they were so credited. 
A deduction under this section will not be denied by reason of the fact 
that the amounts credited as dividends or interest, otherwise deductible 
under section 591, are subject to the terms of a pledge agreement 
between the taxpayer and the depositor or holder of an account. In the 
case of a domestic building and loan association having nonwithdrawable 
capital stock represented by shares, no deduction is allowable under 
this section for amounts paid or credited as dividends on such shares. 
In the case of a taxable year ending after December 31, 1962, for 
special rules governing the treatment of dividends or interest paid or 
credited for periods representing more than 12 months, see section 
461(e).
    (b) Serial associations, bonus plans, etc. If a taxpayer described 
in paragraph (c)(1) or (2) of this section, whichever is applicable, 
operates in whole or in part as a serial 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 the total amount credited as dividends or interest upon such 
shares or deposits, credited to a bonus account for such shares or 
deposits, or allocated to a series of shares for the taxable year, 
notwithstanding that as a customary condition of withdrawal:
    (1) Amounts invested in, and earnings credited to, series shares 
must be withdrawn in multiples of even shares, or
    (2) Such taxpayer has the right, pursuant to bylaw, contract, or 
otherwise, to retain or recover a portion of the total amount invested 
in, or credited as earnings upon, such shares or deposits, such bonus 
account, or series of shares, as a fine, penalty, forfeiture, or other 
withdrawal fee.

In any taxable year in which the right referred to in subparagraph (2) 
of this paragraph is exercised, there is includible in the gross income 
of such taxpayer for such taxable year amounts retained or recovered by 
the taxpayer pursuant to the exercise of such right.

[[Page 343]]

If the provisions of paragraph (a) of Sec. 1.163-4 (relating to 
deductions for original issue discount) apply to deposits made with 
respect to a certificate of deposit, time deposit, bonus plan or other 
deposit arrangement, the provisions of this paragraph shall not apply.
    (c) Effective date. The provisions of paragraphs (a) and (b) of this 
section shall apply to:
    (1) Dividends or interest paid or credited after October 16, 1962, 
by any taxpayer which (at the time of such payment or credit) qualifies 
as (i) a mutual savings bank not having capital stock represented by 
shares, (ii) a domestic building and loan association (as defined in 
section 7701(a)(19)), (iii) a cooperative bank (as defined in section 
7701(a)(32)), or (iv) any other savings institution chartered and 
supervised as a savings and loan or similar association under Federal or 
State law; and
    (2) Dividends paid or credited before October 17, 1962, by any 
taxpayer which (at the time of such payment or credit) qualifies as (i) 
a mutual savings bank not having capital stock represented by shares, 
(ii) a cooperative bank without capital stock organized and operated for 
mutual purposes and without profit, or (iii) a domestic building and 
loan association (as defined in section 7701(a)(19) before amendment by 
section 6(c) of the Revenue Act of 1962 (76 Stat. 982)).

[T.D. 6728, 29 FR 5855, May 5, 1964, as amended by T.D. 7154, 36 FR 
24997, Dec. 28, 1971]