Rev. Rul. 61-175

Advice has been requested whether, in the case of a trust established under New York State law by several savings banks as their medium for certain security transactions, the grantor banks should take as their own the deductions attributable to the trust.

The banks entered into a trust agreement with a trust company in order to fulfill the requirements of section 235(20) of the New York Banking Law, Volume 4, McKinney's Consolidated Laws of New York, Annotated, enabling banks to invest in certain federally guaranteed securities, mortgages, and deeds of trust. Under the provisions of the trust instrument, the trustee acquired as part of the trust corpus certain mortgages and issued certificates of participating interest to each grantor bank.

The trustee cannot vary the investment portfolio of the trust. Therefore, the trust is not considered an association taxable as a corporation. See section 7701(a)(3) of the Internal Revenue Code of 1954 and section 301.7701-4(c) of the Regulations on Procedure and Administration.

The interests in the income of the trust, including capital gains, have been reserved to the grantors in proportion to their respective contributions. Therefore, under the provisions of section 677(a) of the Code, each grantor bank is to be treated as the owner of an aliquot portion of the trust. In addition, each grantor bank is to be so treated under the provisions of section 674(a) of the Code because the beneficial enjoyment of the corpus and the income therefrom is subject to a power of disposition in each bank as to its proportionate interest, by reason of a power to assign which is expressly reserved in the governing instrument and also by reason of the rule of New York State law that grantors cannot create a spendthrift trust with respect to reserved interests, but necessarily retain a power to convey them or to cause them to be reached by persons to whom they are under legal obligation. See section 34 of the New York Personal Property Law, Volume 40, McKinney's Consolidated Laws of New York, Annotated, and Newton v. Hunt et al. , 119 N.Y.Supp. 3, affirmed, 95 N.E. 1134.

Since each bank is an owner of a portion of the trust, it is held that all income, deductions and credits attributable thereto are to be treated as those of that bank, under section 671 of the Code.

Any income which is taxable to the certificate holders under section 671 of the Code should not be reported on the Form 1041, but such income and the amounts of deductions and credits applicable thereto should be shown in a separate statement to be attached to the Form 1041. See section 1.671-4 of the Income Tax Regulations.