Rev. Rul. 58-34

Advice has been requested whether a state-chartered savings and loan association whose investment certificate holders are not members of the association is a person carrying on the banking business within the meaning of section 1441 of the Internal Revenue Code of 1954, and whether amounts paid to nonresident alien individuals on its investment securities constitute income from sources within the United States, subject to withholding of tax under section 1441 of the Code.

M savings and loan association is a guarantee stock organization incorporated under the laws of the State of R as a state savings and loan association. The corporation was formed to transact the general business of a savings and loan association and for the purpose of issuing membership shares, stock and investment certificates. Its authorized capital is divided into shares of guarantee stock having a stated value, all of which are set apart as a fixed and permanent capital. The owners of the stock are the owners of the corporation, and, together with the borrower members who have one vote each, are the only ones who have a vote in the election of corporate officers at annual meetings. The investment certificates, issued as fully paid investment certificates or as periodic payment investment certificates, with or without passbooks, in effect represent deposits in the association which may be withdrawn in whole or in part on demand, subject only to a statutory notice or intention to withdraw. The holders of these certificates are not members of the association and have none of the rights, powers, and liabilities incident thereto. They have no right to participate in the profits or dividends of the association. They are, however, entitled to interest on the value of their investment as determined by the board of directors and/or the state savings and loan commissioner and as provided by law.

Section 1441 of the Code requires the withholding of tax at the source with respect to all items of fixed or determinable annual or periodical income from sources within the United States paid to a non-resident alien individual, except interest on deposits with persons carrying on the banking business paid to persons not engaged in business in the United States.

In Revenue Ruling 54-624, C. B. 1954-2, 16, it is held that savings accounts in Federal savings and loan associations are not deposits with persons carrying on the banking business and that distributions of earnings by these associations constitute dividend income to the holders of such savings accounts. These rules apply equally to state-chartered savings and loan associations unless it can be shown that such associations are not in fact similar in all material respects to the organizational make-up of Federal savings and loan associations. In a Federal savings and loan association, funds deposited therein are placed in savings accounts, and earnings, less expenses of operation and surplus, are periodically paid to, or credited to, the holders of such savings accounts. All holders of an association's savings accounts and all borrowers therefrom are members of the association and have, through participation in the election of a board of directors, a voice in the management of the association.

M savings and loan association, however, differs from a Federal savings and loan association in that holders of investment certificates are not members of the association, have no voice in its management or right to participate in the event of dissolution, and are entitled only to a return of their deposit plus interest. A debtor-creditor relationship exists between M and its investment certificate holders, whereas such relationship does not exist between a Federal savings and loan association and holders of savings accounts in such association.

Accordingly, it is held that a state-chartered savings and loan association, controlled by its stockholders and "borrower members" and whose investment certificate holders are not members of the association, is a person carrying on the banking business within the meaning of section 1441 of the Code. Amounts paid on the investment certificates owned by nonresident alien individuals not engaged in trade or business in the United States constitute interest on deposits with persons carrying on the banking business and, therefore, are not subject to the withholding of tax under section 1441 of the Code.