Rev. Rul. 88-18

1988-1 C.B. 402, 1988-11 I.R.B. 17.

                       Internal Revenue Service

                                 Revenue Ruling

     INSOLVENT OR BANKRUPT BANK OR TRUST COMPANY; DEFINITION; COLLECTION OF

                                      TAX

                           Published: March 14, 1988

SECTION 7507. - EXEMPTION OF INSOLVENT BANKS FROM TAX, 26 CFR 301.7507-1: Banks and trust companies covered

  Insolvent or bankrupt bank or trust company; definition; collection of tax.  A savings and loan association and a building and loan association come within the term 'bank and trust company' as used in section 7507 of the Code for purposes of the deferral of collection of taxes of bankrupt or insolvent bank and trust companies.

ISSUE

  Does a savings and loan association or a building and loan association come within the meaning of a 'bank and trust company' as that term is used in section 7507 of the Internal Revenue Code, relating to the deferral of collection of taxes of bankrupt or insolvent banks and trust companies?

FACTS

  The primary purpose of a savings and loan or building and loan association is the solicitation of savings for deposit in share accounts on which dividends are paid and from which loans are made.

LAW AND ANALYSIS

  Section 7507(a) of the Code provides that in the case of a bankrupt or insolvent bank or trust company, a substantial portion of whose business consists of receiving deposits and making loans and discounts, no tax shall be assessed or collected that would diminish its assets necessary for full payment of all its depositors. Section 7507(d) provides that section 7507 shall not apply in the case of the employment taxes imposed by Chapters 21 and 23.

  Section 301.7507-2(a) of the Regulations on Procedure and Administration provides that section 7507 is intended to assist depositors of a bank that has ceased to do business because of insolvency to recover their deposits, by prohibiting collection of taxes of the bank that would diminish the assets necessary for payment of its depositors and also to assist depositors of banks that are in financial difficulties but continue in business.

  The purpose of the statute is only to defer the collection of taxes to the extent the tax money goes to pay depositors. The bank and its owners are not intended to gain, as the taxes remain collectible out of any other part of the earnings not paid to the depositors. Clinton Trust Co. v. United States, 52 F. Supp. 671 (Ct. Cl. 1943).

  There are both organizational and operational similarities between the usual banking institution and a savings and loan or building and loan association, such as: (1) the receiving of money deposits from the general public and the permitting of withdrawals therefrom, (2) the payment of interest (even though it may be denominated as dividends) by the institution or association upon funds deposited with it, (3) the insuring of such deposits by an agency of the federal government, and (4) the making of loans. The Depository Institutions Deregulation and Monetary Control Act of 1980, Pub. L. No. 96-221, 94 Stat. 132, enlarged the authority of savings and loan associations to provide consumer services previously limited to commercial banks, such as checking accounts, consumer loans and trust services as well as home mortgage loans. See. S. Rep. No. 96-368, 96th Cong., 1st Sess. 3 (1980), reprinted in 1980 U.S. Code Cong. & Admin. News, Vol. 2, 236, 279.

  Under various provisions of the Code, savings and loan associations, building and loan associations, and banks or trust companies are accorded different tax treatment. However, for purposes of section 7507 of the Code, no substantial difference exists between deposits in a savings and loan or building and loan association and deposits in a bank or trust company. Generally, the holder of a share account in a savings and loan or building and loan association is no more an investor than is a holder of a deposit account in a bank or trust company. Therefore, depositors in savings and loan associations or building and loan associations are entitled to the protection provided by section 7507.

HOLDING

  A savings and loan association and a building and loan association come within the meaning of the term 'bank or trust company' as used in section 7507 of the Code.

DRAFTING INFORMATION

  The principal author of this revenue ruling is Clement P. Frenchy of the Individual Tax Division. For further information regarding this revenue ruling contact Mr. Frenchy on (202) 566-4751 (not a toll-free call).

Rev. Rul. 88-18, 1988-1 C.B. 402, 1988-11 I.R.B. 17.