PARENT CORPORATION THAT IS VOTING TRUST GRANTOR AND SOLE BENEFICIARY 'DIRECTLY' OWNS TRUST'S STOCK

Rev. Rul. 84-79

ISSUE

Does a corporation that is the grantor and sole beneficiary of a revocable voting trust "directly" own stock that it transfers to that voting trust for purposes of section 1504(a) of the Internal Revenue Code under the circumstances described below?

FACTS

P, a domestic corporation, owns all the outstanding stock of S corporation. S owns certain aircraft. Under Federal Aviation Administration (FAA) regulations, 75 percent of the voting interest of a corporation wishing to register its aircraft with the FAA must be owned or controlled by United States citizens. See 14 C.F.R. section 47 (1982). For purposes of the FAA regulations (14 C.F.R. section 47.2 (1982)), P does not qualify as a United States citizen. As a result, P transferred all of its S stock to a revocable voting trust to enable S to register its aircraft with the FAA in accordance with FAA regulations. See 14 C.F.R. section 47.8 (1982).

Under the terms of the trust agreement, the trustee has all voting powers associated with the S stock while the trust agreement is in force. However, the trustee may not vote the S stock in favor of either a sale of substantially all of S's assets or a dissolution of S without P's authorization.

The trust agreement provides that all dividends (except stock dividends) will be paid directly to P. The trustee may not alienate or dispose of any of the S stock without P's authorization. P may remove the trustee at any time without cause and appoint a qualified successor trustee. The trust agreement may be amended or terminated at any time by P and, unless so terminated, will continue for 10 years.

P and S filed a consolidated federal income tax return that included income, gain and loss of both P and S for the entire tax year that included the transfer by P of its S stock to the voting trust.

LAW AND ANALYSIS

Section 1501 of the Code provides that an affiliated group of corporations shall have the privilege of filing a consolidated return.

Section 1504(a) of the Code provides that the term "affiliated group" means one or more chains of includible corporations connected though stock ownership with a common parent corporation that 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.

The direct ownership requirement of section 1504(a) of the Code is interpreted to mean beneficial ownership. Miami National Bank v. Commissioner, 67 T.C. 793 (1977). This recognizes that substance rather than form should control in determining ownership. "The direct ownership required by the statute is not merely possession of the naked legal title, but beneficial ownership, which carries with it dominion over the property." Macon, Dublin & Savannah Railroad Co. v. Commissioner, 40 B.T.A. 1266, 1273 (1939), acq. 1940-1 C.B. 3. The court in Macon premised its decision on the Supreme Court's statement that "taxation is not so much concerned with the refinement of title as it is with actual command over the property taxed...." Corliss v. Bowers, 281 U.S. 376, 378 (1930), IX-1 C.B. 254. Therefore, legal title alone does not constitute direct ownership for purposes of section 1504(a). Miami National Bank. As a corollary, possession of everything but legal title is equivalent to direct ownership. See Rev. Rul. 70-469, 1970-2 C.B. 179.

In Rev. Rul. 70-469, a corporation, P, owns 80 percent of the stock of corporation S. P causes the name of A, as nominee, to appear as the record owner of a share of S's stock. Rev. Rul. 70-469 concludes that P directly owns that share of stock for purposes of section 1504(a) of the Code, because the only thing lacking in P's complete and absolute ownership of that share is the legal title, which P may at any time obtain by a demand upon A.

In the instant situation, P's ownership of the S stock is equivalent to the ownership P has in the share A holds in Rev. Rul. 70-469. In this case, as in Rev. Rul. 70-469, P lacks legal title to the S stock. In Rev. Rul. 70-469, P can request legal title of the S stock from its nominee at any time. Likewise, in this case, P has the ability to regain legal title to the S stock at any time by revoking the trust. Further, P's control of S is demonstrated by P's power to replace the trustee without cause at any time.

The voting trust agreement in the instant situation indicates that P's dominion over the S stock is "as complete as the dominion exercisable by one having both beneficial and legal ownership." Rev. Rul. 70-469. P, therefore, owns the S stock "directly" within the meaning of section 1504(a) of the Code.

HOLDING

P "directly" owns all of the stock of S within the meaning of section 1504(a) of the Code, nonwithstanding the transfer of all of the S stock to a revocable trust under the circumstances described below.