Rev. Rul. 81-37

1981-1 C.B. 368, 1981-5 I.R.B. 13.

                       Internal Revenue Service
                                 Revenue Ruling

         PERSONAL HOLDING COMPANIES; EXEMPTION; INDUSTRIAL LOAN COMPANY

                          Published: February 2, 1981

SECTION 542.--DEFINITION OF PERSONAL HOLDING COMPANY, 26 CFR 1.542-1: General rule

(Also Section 581; 1.581-1.)

  Personal holding companies; exemption; industrial loan company. An industrial loan company that fails to qualify for the exemption from personal holding company status provided by section 542(c)(6) of the Code may not qualify for the exemption provided by section 542(c)(2) for banks.

ISSUE

  May an industrial loan company that fails to qualify for the exemption from personal holding company status provided by section 542(c)(6) of the Internal Revenue Code qualify for the exemption provided by section 542(c)(2)?

FACTS

  The taxpayer is an industrial loan company, a type of lending or finance company.  More than 50 percent of the value of its outstanding stock is owned, either directly or indirectly, by five or fewer individuals.  In past years, the taxpayer was exempt from paying tax as a personal holding company under section 541 of the Code because it was a lending or finance company described in section 542(c)(6) of the Code.

  In 1979, the taxpayer made a loan of $10,000 to one of its shareholders who owned more than 10 percent of its outstanding stock.  Because of this loan, the taxpayer no longer met the requirements specified in section 542(c)(6) of the Code that a lending or finance company must satisfy to be exempt from personal holding company status.  However, taxpayer met the definitional requirements of a bank under section 581.  Therefore, the taxpayer claimed an exemption from personal holding company status under section 542(c)(2) for 1979.

LAW AND ANALYSIS

  Section 542 of the Code defines the term 'personal holding company' for purposes of the imposition of the personal holding company tax under section 541.

  Section 542(c)(2) of the Code provides that the term 'personal holding company' does not include a bank as defined in section 581.

  Section 542(c)(6) of the Code provides that the term 'personal holding company' does not include a lending or finance company if certain specific requirements are met.  One of the requirements is that loans outstanding at any time during the taxable year to a shareholder owning, directly or indirectly, 10 percent or more in value of the outstanding stock of the company may not exceed $5,000 in principal amount.

  While section 542(c)(6) of the Code does not use the term 'industrial loan company,' the exemption from personal holding company status provided in former section 542(c)(8) of the 1954 Code applied to such companies, H.R. Rep. No. 2333, 77th Cong., 2d Sess. 135 (1942), 1942-2 C.B. 372; and that section was consolidated by the Revenue Act of 1964, Pub. L. 88-272, section 225, 1964-1 (Part 2) C.B. 6, 54, into present section 542(c)(6).  See H.R. Rep. No. 749, 88th Cong., 1st Sess. 80 (1964), 1964-1 (Part 2) C.B. 125.

  In Norfolk Industrial Loan Association v. United States, Civil No. 455-69-N  (E.D. Va., July 8, 1970), the taxpayer, an industrial loan company similar to the taxpayer in this situation, claimed that it was not liable for the personal holding company tax because it could qualify for exemption either under section 542(c)(6) of the Code as an exempt lending or finance company or under section 542(c)(2) as a bank.  After examining the legislative history of section 542, the court held that an industrial loan association must qualify under section 542(c)(6) in order to be exempt from the tax imposed by section 541.

  Moreover, because section 542(c)(6) is a specific provision with respect to lending or finance companies, including industrial loan companies, it takes precedence over the more general section 542(c)(2) in this instance. See Essenfeld v. Commissioner, 37 T.C. 117 (1961), aff'd 311 F.2d 208 (2nd Cir. 1962), concerning the precedence given specific statutory enactments.

HOLDING

  An industrial loan company that fails to qualify for the exemption from personal holding company status provided by section

542(c)(6) of the Code may not qualify for the exemption provided by section 542(c)(2).

Rev. Rul. 81-37, 1981-1 C.B. 368, 1981-5 I.R.B. 13.