Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-100

1973-1 C.B. 613

Sec. 7701

IRS Headnote

A domestic corporation's transfer of securities to a Canadian security holder to meet the asset maintenance requirements of the Canadian Foreign Insurance Companies Act does not create a trust if ownership and discretionary powers are retained by the corporation.

Full Text

Rev. Rul. 73-100

Advice has been requested concerning the Federal income tax consequences of the transaction described below.

The taxpayer, a domestic corporation, provides retirement and insurance benefits to staff members of colleges, universities, and other institutions engaged primarily in educational or research work. It also provides such retirement and insurance coverage to participating policyholders in Canada. The Canadian Foreign Insurance Companies Act requires foreign insurance companies doing business in Canada to register and comply with the Act. One of the requirements of the Act is that the company maintain assets in Canada of an amount at least equal to its liabilities to policyholders in Canada. In satisfaction of this requirement, qualifying assets may be deposited with either the Receiver General of Canada or a Canadian security holder. In order to meet this obligation, the taxpayer intends to transfer securities to a Canadian security holder.

Pursuant to the security agreement, the taxpayer will be recognized as the owner of the securities so deposited and, as long as the assets in Canada do not fall below the value required under the terms of the Act, the taxpayer will be entitled to exchange securities at its discretion and shall be entitled, at any time, to require the security holder to sell or dispose of any security on deposit. Only when acting under the written direction of persons authorized by the taxpayer will the security holder have full authority to transfer, sell, or exchange the securities held by it. In addition, the security holder shall turn over to the taxpayer all income from the securities on deposit when collected.

The specific question is whether the arrangement entered into by the taxpayer and the Canadian security holder results in the creation of a trust for Federal income tax purposes.

Section 301.7701-4 of the Procedure and Administration Regulations provides, in part, that, generally speaking, an arrangement will be treated as a trust under the Internal Revenue Code if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility.

In the instant case, the taxpayer retains complete control over the securities on deposit so long as the assets in Canada do not fall below the value required under the terms of the Act. The security holder does not possess discretionary power to deal with the securities on deposit. Furthermore, the taxpayer is entitled to the income from the securities. This arrangement between the taxpayer and the security holder does not create a trust within the meaning of section 301.7701-4 of the regulations, but rather a mere security arrangement. See City National Bank and Trust Co. v. United States, 109 F. 2d 191 (1940). It is the right of ownership with respect to such securities during the taxable year that controls rather than the possibility that under certain circumstances, nonexisting during such period, the right of ownership might be forfeited. See Revenue Ruling 55-458, 1955-2 C.B. 579.

Accordingly, it is held, in the instant case, that the arrangement entered into by the company and the Canadian security holder does not result in the creation of a trust for Federal income tax purposes.