Rev. Rul. 70-469

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in G.C.M. 7331, C.B. VIII-2, 135 (1929).

The question presented is whether a parent corporation owns "directly" a share of stock within the meaning of section 1504 of the Internal Revenue Code of 1954 under the circumstances described below.

P corporation owned 80 percent of the stock of S corporation. For valid corporate purposes P caused the name of A, as nominee, to appear on the stock book and records of S as the owner of one of P's shares of S. A was at all time legally obligated to hold and deal with such share according to such orders and direction as P, from time to time, gave him. The certificate representing the share was endorsed to A, transfer was made upon the stock book of S, A's name was entered upon the stock book as the owner of the share, and A endorsed the new certificate in blank and delivered it to P which retained it in its possession. Placing the record ownership of the share of S in A qualified A as a director of S.

The legal relationship between P and A, as nominee, is clear. The entire beneficial, or equitable, ownership is in P, but the legal title to the share is in A. A's relationship to P is essentially that of an agent to his principal.

The almost universal rule that a nominee is entitled to vote as a shareholder and qualified to act as a director is not premised upon the ground that the nominee is the equitable, beneficial, or real owner, but upon a quite different ground as expressed by the Supreme Court of Wisconsin in Casper v. Kalt-Zimmers Manufacturing Co., 159 Wis., 517 (1914), 149 N.W., 754 (1914):

The reason given for a * * * rule requiring that the equitable or beneficial interest in the stock should be in a person in order to render him eligible as an officer * * * is that officers of a corporation should be personally interested in its welfare, and that can be the case only when the legal and beneficial interest unite (sic) in the same person. We do not so consider it. Trust duties are some of the most sacred duties there are, and the confidence reposed through them is seldom abused. Even where stock is transferred for the express purpose of qualifying one to hold a corporate office, the person so transferring it is personally interested in the sound management of the corporation and would be unlikely to jeopardize his interest by placing the stock in incompetent hands. The rule that merely a legal title qualifies is more in consonance with present business requirements and is fraught with no undue hazard to stockholders.

It is uniformly recognized that under circumstances such as those in the instant case the principal is the owner of the share, is in receipt of income when dividends are paid, and realizes gain or loss from the sale or disposition of the share. Elizabeth Berthold et al. v. Commissioner, 12 B.T.A. 1306, acquiescence, C.B. IX-1, 5 (1930).

The question then, is whether P owns "directly" the share of S within the meaning of section 1504(a) of the Code.

Section 1504(a) reads as follows:

(a) DEFINITION OF "AFFILIATED GROUP".--As used in this chapter, the term "affiliated group" means one or more chains of includible corporations connected through stock ownership with a common parent corporation which is an includible corporation if--

(1) Stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of each of the includible corporations (except the common parent corporation) is owned directly by one or more of the other includible corporations; and

(2) The common parent corporation owns directly stock possessing at least 80 percent of the voting power of all classes of stock and at least 80 percent of each class of the nonvoting stock of at least one of the other includible corporations.

As used in this subsection, the term "stock" does not include nonvoting stock which is limited and preferred as to dividends.

The only thing lacking in P's complete and absolute ownership of the the share of S stock that is held by A is the legal title and this P may at any time obtain by a demand upon A. P, being possessed of the entire beneficial ownership of the share and thus owning it, owns it "directly" because of its direct power over the share possessed by A, a power exercisable and legally enforceable at all times, and as complete as the dominion exercisable by one having both beneficial and legal ownership.

Accordingly, in the instant case, the stock of S and P transferred to A, as nominee, is owned directly by P within the meaning of section 1504(a) of the Code.

G.C.M. 7331 is hereby superseded, since the position stated therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.