Rev. Rul. 54-624

Advice has been requested whether Federal savings and loan associations and State-chartered savings and loan associations and building and loan associations are persons carrying on the banking business within the meaning of section 2105(b) of the Internal Revenue Code of 1954 (sec. 863(b) of the Internal Revenue Code of 1939), and whether distributions of earnings by such associations to nonresident alien individuals not engaged in business in the United States come within the exception contained in section 861(a)(1)(A) of the 1954 Code (sec. 119(a)(1)(A) of the 1939 Code).

The primary function of Federal savings and loan associations is to provide local mutual thrift institutions in which people may invest their funds and to provide a means for financing the purchase of homes. They are chartered by the Federal Home Loan Bank Board under authority of section 5(a) of the Home Owners' Loan Act of 1933, 48 Stat. 128. Funds deposited in a Federal savings and loan association are placed in savings accounts, and earnings, less expenses of operation and surplus, are periodically paid to, or credited to, the holders of such savings accounts. All accounts are insured by the Federal Savings and Loan Insurance Corporation up to an amount not in excess of $10,000. The ownership of a savings account may be evidenced by either an account book or a certificate. Withdrawals of all or any part of the funds deposited are permitted upon application of the owner of the account. All holders of an association's savings accounts and all borrowers therefrom are members. The organizational make-up of State savings and loan associations and building and loan associations is similar in most respects to that of Federal savings and loan associations.

Section 2105 of the Internal Revenue Code of 1954 provides in part as follows:

SEC. 2105. PROPERTY WITHOUT THE UNITED STATES.

* * *

(b) BANK DEPOSITS.-For purposes of this subchapter, any moneys deposited with any person carrying on the banking business, by or for a nonresident not a citizen of the United States who was not engaged in business in the United States at the time of his death shall not be deemed property within the United States.

Section 861 of the Internal Revenue Code of 1954 provides in part as follows:

SEC. 861. INCOME FROM SOURCES WITHIN THE UNITED STATES.

(a) GROSS INCOME FROM SOURCES WITHIN UNITED STATES.-The following items of gross income shall be treated as income from sources within the United States:

(1) INTEREST.- * * * not including-

(A) interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States * * *.

The word `deposit,' as used in section 2105(b) of the Code, refers to the generally accepted use of that term in banking practice. See Estate of Annina Fabbricotti Fara Forni v. Commissioner , 47 B.T.A. 76. A general deposit is the payment of money into the bank to be repaid on demand. The relation between the bank and the general depositor is that of debtor and creditor. A special deposit is a delivery of property, securities, or even money to the bank for the purpose of having the same safely kept and the identical thing deposited returned to the depositor, or one for some specific purpose. There is no debtor and creditor relation between the bank in which a special deposit is made and its special depositor, their status or relation being that of agent and principal, bailee and bailor, or trustee and cestui que trust, or a combination of such relationships. See G.C.M. 22419, C.B. 1940-2, 288.

A depositor in a bank has no voice in the management of the bank and he does not share in the distribution of the assets in the event of liquidation, dissolution or winding up of the business. However, each member of a Federal savings and loan association has, through participation in the election of a board of directors, a voice in the management of the association. In addition to the right to share in the profits, all holders of savings accounts are entitled to equal distribution of assets, pro rata to the value of their savings accounts, in the event of voluntary or involuntary dissolution or winding up of the association. The rights possessed by the shareholders of the association are in the nature of proprietary interests which are not at all similar to the rights of a general or special depositor in a bank.

In view of the foregoing, it is held that a Federal savings and loan association is not a person carrying on the banking business within the meaning of section 2105(b) of the Internal Revenue Code of 1954. Accordingly, a savings account in such association owned by a nonresident not a citizen of the United States who was not engaged in business in the United States at the time of his death, is not exempt from Federal estate tax as property without the United States.

Whether amounts distributed by Federal savings and loan associations come within the exception provided by section 861(a)(1)(A) of the Code depends upon whether such distributions constitute interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States.

In I.T. 4045, C.B. 1951-1, 34, it is held that distributions of earnings by Federal savings and loan associations constitute dividend income to the members of the associations.

Accordingly, it is held that distribution of earnings by a Federal savings and loan association paid to a nonresident alien not engaged in business in the United States do not come within the exception contained in section 861(a)(1)(A) of the Internal Revenue Code of 1954. Such distributions constitute dividend income to the members of the association.

The foregoing rules also apply to State-chartered savings and loan associations and building and loan associations, unless it can be shown that such associations are not in fact similar in all material respects to the organizational makeup of Federal savings and loan associations.