Rev. Rul. 54-140

Advice is requested as to the effect for Federal income tax purposes of a distribution by a taxpayer corporation of the entire capital stock of a wholly-owned subsidiary to a trust for the benefit of the corporation's stockholders under the circumstances set forth below.

The taxpayer corporation is a national bank which was organized under the national banking laws. It has for many years owned all the stock of a subsidiary corporation whose assets consist primarily of cash and real estate and whose activities consist of dealings in various properties and transactions which are not permitted to the bank.

Because of changes in the National Banking Act and the rulings and requirements of the Comptroller of the Currency whereby national banks are restricted in regard to the extent and manner in which they may deal in investment securities, and the acquisition of stock in other corporations for their own accounts, it became necessary for the taxpayer bank to eliminate the stock of the subsidiary from its assets. The bank accomplished this by distributing the stock to a trust which was organized to hold the stock for the pro rata benefit of the stockholders of the bank.

The trust agreement provides that the trustees shall exercise all rights and privileges of absolute owners of the stock including, but not limited to, the right to vote the stock for any purpose whatsoever, to receive all dividends, to sell or transfer the stock, provided that any action so taken shall be first authorized by beneficiaries owning at least a majority of the beneficial interest in the assets of the trust.

No papers were distributed to the stockholders of the bank evidencing their beneficial interest in the stock of the subsidiary, therefore, they received nothing they can dispose of separately from the bank stock. Under the arrangement, the stock of the bank and the beneficial interest in stock of the subsidiary may not be transferred separately. If and when any shares of stock of the bank are transferred, the pro rata interest of the stockholders of the bank in the stock of the subsidiary to the extent of the shares so transferred will automatically be transferred along with the transfer of the bank's stock without the execution of any separate papers. No notation appears on the bank stock certificates evidencing the beneficial interest in the stock of the subsidiary.

Inasmuch as the trust agreement provides that no action may be taken by the trustees without the consent of a majority of the holders of the beneficial interests, ownership of the stock of the subsidiary was in effect transferred from the bank to the bank's stockholders, who thereby became free to control such stock without fear of interposition of the bank's creditors, depositors, and other third parties.

Section 115(a) of the Internal Revenue Code provides in part as follows:

* * * The term `dividend' when used in this chapter ch. 1 * * * means any distribution made by a corporation to its shareholders, whether in money or other property, (1) out of its earnings or profits accumulated after February 28, 1913, or (2) out of the earnings or profits of the taxable year (computed as of the close of the taxable year without diminution by reason of any distributions made during the taxable year), without regard to the amount of earnings and profits at the time the distribution was made. * * *

The bank in the instant case did not undergo a reorganization. It already owned the stock of the subsidiary. By the transaction here considered this stock was severed from the assets of the bank and the beneficial interest thereof passed to the bank's shareholders. The result of such transaction is not different from what it would be if the stock of the subsidiary had been distributed directly to the shareholders of the bank and they in turn placed it in a trust for their benefit. The fact that the stock of the subsidiary is tied up with the bank stock so that nothing may be received by the shareholders of the bank which can be disposed of separately from the bank stock does not serve to render the transaction nontaxable.

In view of the foregoing, it is held that the distribution of the stock of the subsidiary to the trust for the benefit of the shareholders of the bank, measured by the fair market value of the stock at the time of the distribution, represents a taxable dividend to the shareholders of the bank within the meaning of section 115(a) of the Internal Revenue Code, limited, however, to the earnings and profits of the bank available for dividends.