Rev. Rul. 54-623

Advice has been requested whether mutual savings banks organized under the banking law of New York State are persons carrying on the banking business within the meaning of section 2105(b) of the Internal Revenue Code of 1954 (section 863(b) of the 1939 Code) so that moneys deposited with such banks by or for a nonresident decedent who was not engaged in business within the United States at the time of his death are exempt from Federal estate tax, and whether interest paid on deposits in such banks to persons not engaged in business within the United States is excepted from income from sources within the United States within the provisions of section 861(a)(1)(A) of the 1954 Code (section 119(a)(1)(A) of the 1939 Code).

Mutual savings banks in New York may be organized under the New York banking law with the approval of the Superintendent of Banks. The incorporators of a savings bank are usually designated the trustees of the bank. Section 246 of the New York State banking law provides that the board of trustees shall have the entire management and control of the affairs of savings banks and that all vacancies in such membership shall be filled by election by the remaining trustees. In such an institution there is no capital stock and there are no stockholders. Funds of depositors are placed in savings accounts and are invested in securities prescribed by State law. The earnings, less expenses of conducting the business and amounts required to be credited to surplus, inure to the benefit of the depositors in dividends. It is provided under section 243 of the New York State banking law that the surplus fund shall not be available for the payment of dividends to depositors.

Mutual savings banks are eligible for membership in the Federal Reserve System and for insurance coverage by the Federal Deposit Insurance Corporation. Withdrawals of funds deposited are permitted upon application of the owner of the account.

Section 2105(b) of the Internal Revenue Code of 1954 provides in part as follows:

SEC. 2105. PROPERTY WITHOUT THE UNITED STATES.

* * * * * * *

(b) BANK DEPOSITS.--For purposes of this subchapter, any moneys deposited with any person carrying on the banking business, by or for a nonresident not a citizen of the United States who was not engaged in business in the United States at the time of his death shall not be deemed property within the United States.

Section 861 of the Internal Revenue Code of 1954 provides in part as follows:

SEC. 861. INCOME FROM SOURCES WITHIN THE UNITED STATES.

(a) GROSS INCOME FROM SOURCES WITHIN THE UNITED STATES.--The following items of gross income shall be treated as income from sources within the United States:

(1) INTEREST.-- * * * not including --

(A) Interest on deposits with persons carrying on the banking business paid to persons not engaged in business within the United States * * *.

In I. T. 1461, C. B. I-2, 148 (1922), it was held that amounts paid to depositors in a New York mutual savings bank on their deposits were interest rather than dividends for which no dividends-credit was allowable under the provisions of section 216 of the Revenue Act of 1921. It was stated in this ruling that the "depositors in this bank are in no way shareholders or members of the corporation. Clearly the only members of the corporation are the trustees. Although a relation of trust and confidence exists between the bank and each of its depositors, the primary relationship between the bank and each of its depositors is that of debtor and creditor. People v. Barker, 40 N. Y. Supp., 1001. Decisions of the courts of one of two States go so far as to hold that the relationship of a depositor to his savings bank is analogous to that of a stockholder of a bank of discount, but even these few decisions do not go so far as to hold that depositors are stockholders or members of a banking corporation."

The relation existing between a mutual savings bank and its depositor is that of debtor and creditor. In re Gross, 62 N. Y. S. 2d 392 and Myers v. Albany Savings Bank, 1946, 60 N. Y. S. 2d 477. Under the New York State banking law a depositor in a savings bank has no voice in the management of the bank, such powers being vested solely in a board of trustees over which the depositor has no control.

A mutual savings bank is described in 7 Corpus Juris, 851, as:

* * * an institution only partially embodying the features of a bank in the full sense of the term, the purpose of which is to promote the prosperity of persons of small means and limited opportunities of investing them by receiving their savings in even trivial sums, and lending them in larger amounts, whereby interest may be gained, to be divided among the depositors. In the strict sense of the term, a savings bank is an institution, the object of which is, to quote the language of some of the early charters, "to receive and safely invest the savings of mechanics, laborers, servants, minors and others, thus affording to such persons the advantages of security and interest for their money, and in this way ameliorating the condition of the poor and laboring classes by engendering habits of industry and frugality." The deposits constitute the only resources of the institution; no capital, as in the case of banks of deposit and discount, stands between the depositor and loss * * *. (I. T. 3076, C. B. 1937-1, 116.)

In view of the foregoing, it is held that mutual savings banks organized under the banking law of New York State are persons carrying on the banking business within the meaning of section 2105(b) and section 861(a)(1)(A) of the Internal Revenue Code of 1954. Funds on deposit in such banks owned by a nonresident decedent not a citizen of the United States who was not engaged in business in the United States at the time of his death are exempt from Federal estate tax. Interest on such deposits paid to persons not engaged in business within the United States does not constitute income from sources within the United States.

These rules apply equally to mutual savings banks organized under the laws of other States unless under the laws of that State the depositor is in fact held to be a share member of such organization to the end that his interest therein is proprietary in nature. Cf. Rev. Rul. 54-624, below, relative to Federal savings and loan associations and State-chartered savings and loan associations and building and loan associations.