Rev. Rul. 77-53

Advice has been requested as to the reporting requirements under section 6041(a) of the Internal Revenue Code of 1954 when commercial banks and savings and loan associations collect monthly payments from mortgagors pursuant to second deeds of trust, and either pay the collected amounts to the mortgagees or credit the payments to the mortgagees' accounts.

Customers of banks and savings and loan associations become mortgagees by obtaining second deeds of trust, either through the customers' efforts or through a mortgage broker. The customers request that the banks collect the monthly payments from the mortgagors and either pay the collected amounts to the customers or credit them to the customers' accounts. Some of the banks charge a fee for such collection service, while others do not. Also, some of the banks compute the amount of interest the customers receive with respect to the second deeds of trust, while others do not. However, if the mortgagors should become delinquent, none of the banks will take any legal action to force the mortgagors to make payments.

Section 6041(a) of the Code provides, in part, that an information return shall be filed by all persons engaged in a trade or business who make a payment of $600 or more in any taxable year in the course of such trade or business to another person of fixed or determinable gains, profits and income.

Section 1.6041-3(q) of the Income Tax Regulations provides that returns of information are not required under section 6041 of the Code and sections 1.6041-1 and 1.6041-2 of the regulations with respect to payments made to principals by persons carrying on the banking business, and by persons that are mutual savings banks, cooperative banks, building and loan associations, homestead associations, credit unions, or similar organizations chartered and supervised by Federal or State law, of funds collected when acting in the capacity of collection agents. However, the second sentence of section 1.6041-3(q) states that this exception does not apply to collection of items on a regular and continuing basis under a so-called escrow, trust, custody, or investment advisory agreement.

While the banks in the instant case collect the payments from the mortgagors on a regular and continuing basis, their functions are limited to the receipt of payments on behalf of the customers and either crediting those amounts to the customers' accounts or remitting the amounts directly to the customers. The second sentence of section 1.6041-3(q) requires reporting only where the institution assumes a management function or retains the collected funds under an arrangement other than the customary depositor relationship.

Accordingly, the banks in the instant case are within the exception from reporting contained in section 1.6041-3(q) of the regulations. Therefore, they are not required by section 6041(a) of the Code to file information returns for the payments they receive from the mortgagors that they either pay to mortgagee-customers or credit to the customers' accounts.