Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-42

1973-1 C.B. 142

Sec. 164
Sec. 243

IRS Headnote

Payment by a bank to an exempt insurance company-shareholder equal to the amount of a State tax paid for other shareholders not exempt from such tax constitutes a section 301 distribution includible in the insurance company's income and subject to the dividend received deduction.

Full Text

Rev. Rul. 73-42

Advice has been requested whether the taxpayer, an insurance company, is entitled to a dividend received deduction under section 243(a) of the Internal Revenue Code of 1954 under the circumstances described below.

The taxpayer, a mutual casualty insurance company, is a shareholder in a number of state banks and bank holding companies. Under the laws of the state in which the banks and bank holding companies are located, an intangible personal property tax is assessed against the shareholders for the stock owned in the banks. Certain shareholders, including insurance companies, are exempt from this property tax. It has been the common practice of the banks in the state to pay the tax for its shareholders, and to pay to exempt shareholders the amount of tax they would have been assessed but for their exempt status. While the state statutes do not require that the bank pay the tax for the shareholder, it does require that if any payments are made, all shareholders must be treated equally.

Section 164(e) of the Code provides as follows:

"(e) Taxes of Shareholder Paid by Corporation.--Where a corporation pays a tax imposed on a shareholder on his interest as a shareholder, and where the shareholder does not reimburse the corporation, then-- (1) the deduction allowed by subsection (a) [general rule] shall be allowed to the corporation; and (2) no deduction shall be allowed the shareholder for such tax." (Bracketed words added.)

Section 243(a) of the Code provides, in part, as follows:

"(a) General Rule.--In the case of a corporation, there shall be allowed as a deduction an amount equal to the following percentages of the amount received as dividends from a domestic corporation which is subject to taxation under this chapter:

(1) 85 percent, in the case of dividends other than dividends described in * * *"

Revenue Ruling 63-45, 1963-1 C.B. 36, holds that if an amount is paid by a bank to its shareholder in excess of his liability for the tax attributable to his shares, such excess is not deductible by the bank but is considered a distribution to the shareholder under section 301 of the Code.

The general rule provided in section 164(e) of the Code, applicable to taxes of shareholder paid by corporations, applies only to shareholders upon whom a tax is imposed. It does not apply to payments made for any other purpose other than to satisfy a tax liability. As stated in Revenue Ruling 63-45, any amount paid to a shareholder in excess of his tax liability is not deductible by the payor.

Also see Virginia National Bank v. United States, 450 F.2d 1155 (1971), certiorari denied, 405 U.S. 1065 (1972), holding that payments by a national bank to exempt shareholders that were equal to the amount of state tax that would have been levied on them had the state taxed their interests, were nondeductible dividends, rather than business expenses or taxes.

Accordingly, it is held, based on the facts in this case, that the amount received by the taxpayer is a distribution to a shareholder under section 301 of the Code. To the extent such distribution constitutes a dividend to the taxpayer, it is entitled to the dividend received deduction provided in section 243(a) of the Code.