Rev. Rul. 71-189

Advice has been requested regarding the treatment, for Federal income tax purposes, of amounts held by a bank in inactive savings and checking accounts.

The national bank carries on its books a substantial number of inactive savings and checking accounts. Inactive accounts are accounts for which there has been no activity for at least 12 months and for which the bank is unable to locate the depositors. The bank continues to treat the balances of such inactive accounts as liabilities since it is prohibited by state banking regulations from crediting them to earned surplus and the state statute of limitations does not relieve the bank of liability to depositors of the accounts. In addition the bank is required to continue Federal Deposit Insurance Corporation (F.D.I.C.) insurance coverage on these accounts and is also required to take such balances into account in determining the amount of its reserve against deposits (whether time or demand deposit) that must be maintained under Federal banking regulations.

Section 61 of the Internal Revenue Code of 1954 and section 1.61-1 of the Income Tax Regulations provide that gross income includes all income from whatever source derived, unless excluded by law. Section 1.61-12 of the regulations provides, in pertinent part, that the discharge of indebtedness may result in the realization of income.

In the instant case, the absence of a state statute of limitations, the consequent continuing liability of the bank to the depositor, the continuing liability to provide F.D.I.C. insurance coverage on these accounts, and the continuing requirement that these balances be taken into account in determining the amount of its reserve against deposits, precludes a finding that any such indebtedness was discharged and income realized merely because the accounts are inactive and the depositors cannot be located. Income is realized, in such circumstances, only at such time as the bank is no longer required to maintain F.D.I.C. insurance, or is no longer required to take the inactive accounts into consideration in determining its reserve against deposits, or is no longer required to maintain the inactive accounts as liability accounts on its books. Furthermore, if the bank by affirmative action asserts dominion over such accounts, such as by making book entries which transfer the account from a deposit liability to a surplus account, then such accounts will become income to the bank. In addition, failure of the bank to continue F.D.I.C. insurance coverage, or failure to take the inactive accounts into consideration in determining reserves against deposits, or some other affirmative act by the bank, is sufficient to bring the balances in the inactive accounts into income.

In the instant case, however, the bank took no action to assert dominion over such accounts, it is required by applicable Federal banking regulations to continue F.D.I.C. insurance coverage, and it must account for the balances in determining reserves against deposits. Accordingly, it is held that the balances in the inactive savings and checking accounts are not yet includible in the bank's income.