REVENUE RULE 90-54

1990-2 C.B. 270, 1990-27 I.R.B. 12.

Internal Revenue Service
Revenue Ruling

DOMESTIC BUILDING AND LOAN ASSOCIATION; CHARTER

Published: July 2, 1990

Section 7701. - Definitions, 26 CFR 301.7701-13A: Post-1969 domestic building and loan association.

(See Also Section 593.)

Domestic building and loan association; charter. An institution that is chartered as a bank cannot qualify as a domestic building and loan association under section 7701(a)(19) of the Code.

ISSUE

May a bank qualify as a domestic building and loan association under section 7701(a)(19) of the Internal Revenue Code?

FACTS

Domestic corporation X is chartered and supervised as a bank by the Comptroller of the Currency, and X is operated in accordance with its charter. Previously, X was chartered and supervised as a Federal savings and loan association. X's business consists principally of acquiring the savings of the public and investing in loans. More than 6O percent of X's total assets are assets described in section 7701(a)(19)(C) of the Code.

LAW AND ANALYSIS

Section 7701(a)(19) of the Code provides that the term 'domestic building and loan association' means 'a domestic building and loan association, a domestic savings and loan association, [or] a Federal savings and loan association' that meets certain tests. These are the supervisory test of section 7701(a)(19)(A), the business operations test of section 7701(a)(19)(B), and the assets test of section 7701(a)(19)(C).

It is clear from the introductory language of section 7701(a)(19) that an institution must be a domestic building and loan association, a domestic savings and loan association, or a Federal savings and loan association, in order to come within the statutory definition of the term 'domestic building and loan association.' The tests of subparagraphs (A), (B), and (C) of section 7701(a)(19) are limiting tests, and qualification as one of the three types of institutions listed in the introductory language of that section is a basic requirement.

The introductory language of section 7701(a)(19) has been part of the federal income tax law since 1913 and has consistently served to distinguish domestic building and loan associations from banks. Prior to 1952, section 101(4) of the Internal Revenue Code of 1939 exempted from federal income taxation 'domestic building and loan associations substantially all the business of which is confined to making loans to members.' In contrast, most banks historically were subject to tax. The Revenue Act of 1951, section 313, Pub. L. No. 82-183, 65 Stat. 452, 490, eliminated the exemption for domestic building and loan associations and provided liberal rules for calculating their deductions for additions to bad debt reserves. Different, less liberal rules applied to the bad debt reserves of most banks. The 1951 Act also added the definition of the term 'domestic building and loan association,' using the language of former section 101(4) and including 'domestic savings and loan associations and Federal savings and loan associations.' The Revenue Act of 1962, section 6(c), 1962-3 C.B, 111, 131, revised the definition of the term 'domestic building and loan association' to remove the 'loans to members' requirement and to add new supervisory, business operations, and asset tests. However, the basic requirement of the definition - that the institution be a domestic building and loan association, a domestic savings and loan association, or a Federal savings and loan association - remained unchanged.

Traditionally, the introductory language of section 7701(a)(19) has been applied by reference to an institution's charter and its operation in accordance with that charter. Rev. Rul. 64-123, 1964-1 C.B. (Part I) 521, discussed the requirements of that language. The ruling held that a fundamental requirement of section 7701(a)(19) is that the institution be one of the three types listed:

It is, of course, not enough that substantially all of the business of the association is confined to making loans to members. It must still be a domestic building and loan association, a domestic savings and loan association, or a Federal savings and loan association. . . .* * * *[F]or an association to qualify as a domestic building and loan association, . . . the association must be organized as a building and loan association or savings and loan association pursuant to, and operated in all material respects as such in accordance with, the law of the chartering authority.

1964-1 C.B. (Part I) at 523. Rev. Rul. 64-123 was obsoleted by Rev. Rul. 72- 623, 1972-2 C.B. 654, due to the changes made by the Revenue Act of 1962. However, the ruling was correct in its application of the introductory language of section 7701(a)(19), and that language has not changed.

The traditional importance and meaning of the introductory language of section 7701(a)(19) remain valid. Different statutes and regulations govern the chartering and operation of building and loan associations and savings and loan associations than govern the chartering and operation of banks. In general, the charter is the source of an institution's existence and its right to conduct business. Whether an institution is chartered as a domestic building and loan association or savings and loan association, or as a bank, determines the scope of its authority to transact business and the framework under which it is supervised and examined.

Moreover, Congress still seeks to provide federal income tax treatment for domestic building and loan associations that differs from the treatment for most banks. Code section 585 provides bad debt reserve rules for most banks, while section 593 provides more liberal bad debt reserve rules for domestic building and loan associations as defined in section 7701(a)(19), mutual savings banks, and certain cooperative banks. See also section 595.

In sum, the statutory structure and history of section 7701(a)(19) make it clear that only those types of institutions described in the introductory language of that section may qualify as domestic building and loan associations. The history of section 7701(a)(19) also reveals a long-standing purpose to distinguish between domestic building and loan associations and banks. Traditionally, this distinction has been understood to depend on the manner in which an institution is chartered. The nature of a financial institution's charter still has significance, and Congress has chosen to continue treating domestic building and loan associations more favorably than most banks for purposes of bad debt reserve rules. For these reasons, an institution that is chartered as a bank cannot qualify as a domestic building and loan association under section 7701(a)(19).

In the present situation, X is chartered as a bank. X is not chartered as a building and loan association or a savings and loan association. Accordingly, X is not described in the introductory language of section 7701(a)(19) and therefore cannot qualify as a domestic building and loan association under that section.

HOLDING

An institution that is chartered as a bank cannot qualify as a domestic building and loan association under section 770l(a)(l9) of the Code.

DRAFTING INFORMATION

The principal author of this revenue ruling is Mark S. Smith of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Mr. Smith on (202) 566-3829 (not a toll-free call).

Rev. Rul. 90-54, 1990-2 C.B. 270, 1990-27 I.R.B. 12.