Rev. Rul. 62-155

In view of the decision of the United States Court of Appeals for the Fifth Circuit in the case of Phinney v. Tuboscope Company , 268 Fed.(2d) 233 (1959), further consideration has been given to the position taken in Revenue Ruling 58-325, C.B. 1958-1, 212.

That Revenue Ruling held, on the basis of the decision in the case of Steuben Securities Corporation v. Commissioner , 1 T.C. 395 (1943), that in determining stock ownership for the purposes of section 421(d)(1)(C) of the Internal Revenue Code of 1954, an optionee is considered to own proportionately the present interests of qualifying relatives in a trust holding shares of stock in the corporation by which he has been granted the option and is considered not to own remainder or other remote interests of such relatives, whether vested or contingent.

The question presented in the Steuben case was whether the corporation, most of the stock of which was held in trust, was a personal holding company.

The predecessor sections in the Revenue Acts of 1937 and 1938 to section 503(a)(1) of the Internal Revenue Code of 1939, all of which contain language identical to section 544(a)(1) of the 1954 Code, provided, for purposes of determining whether the stock ownership requirements of the personal holding company provisions were met, `Stock owned, directly or indirectly, by or for a * * * trust shall be considered as being owned proportionately by its * * * beneficiaries.'

The taxpayer contended that it was not a personal holding company because, under those sections, certain remaindermen beneficiaries of the trusts were to be considered as owning a portion of its stock held by the trusts. In holding that the taxpayer was a personal holding company, the court reasoned that to prevent tax avoidance in the personal holding company area, the word `beneficiaries' must be read to mean those who have a direct present in the shares and income in the taxable year and not those whose interest, whether vested or contingent, will or may become effective at a later time.

Subsequent to the publication of Revenue Ruling 58-325, the court was confronted in the Tuboscope case, with the problem of determining a method of computing constructive ownership between a trust and its beneficiaries for purposes of a provision of the Korean War excess profits tax statute. This determination, in turn, depended upon interpreting section 503(a)(1) of the 1939 Code. The court held that the benefits sought were not available to the taxpayer. In arriving at this conclusion it determined that the stock held in trust for a settlor's children, for whom the income was accumulated and who were also the remaindermen, was to be considered owner, under section 503(a)(1), by the children and, therefore, under another provision of section 503(a), by the settlor. The court pointed out that otherwise the purpose of the section to treat members of a family as a unit could be bypassed through the simple expedient of an inter vivos trust.

The considerations which led the court in the Tuboscope case to treat the remaindermen of the trusts as beneficiaries for purposes of section 503(a)(1) of the 1939 Code are applicable in determining the ownership of stock held in trust for purposes of sections 421(d)(1)(C) and 544(a)(1) of the 1954 Code.

Accordingly, it is held that in determining stock ownership for the purposes of section 421(d)(1)(C) and section 544(a)(1) of the Code, the shares held by a trust are considered to be owned by its present or future beneficiaries in proportion to their actuarial interests.

The Internal Revenue Service will continue to follow the holding in the Steuben case, but will not follow that part of the rationale which precluded computing ownership interests of beneficiaries of the trusts, including remaindermen, on an actuarial basis. See Tuboscope, supra .

Inasmuch as Revenue Ruling 58-325, C.B. 1958-1, 212, is contrary to this holding, that Revenue Ruling is hereby revoked.