[Code of Federal Regulations]
[Title 26, Volume 18]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR301.7507-5]

[Page 556-557]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 301_PROCEDURE AND ADMINISTRATION--Table of Contents
 
                          Judicial Proceedings
 
Sec. 301.7507-5  Earnings.

    (a) Availability for tax collection. Earnings of a bank within 
section 7507(b), whether from segregated or unsegregated assets, which 
are necessary for, applicable to, and actually used for, payment of 
depositors' claims under an agreement, are within the immunity of the 
section. If only a portion or percentage of income from segregated or 
unsegregated assets is available and necessary for payment of 
depositors' claims, the remaining income is available for tax 
collection. Earnings of the bank's first fiscal year ending after the 
making of the agreement not applicable to payment of depositors will be 
assumed to be applicable for collection of any tax due prior or 
subsequent to execution of the agreement. Earnings of subsequent fiscal 
periods from unsegregated assets not applicable to depositors' claims 
will be assumed to be applicable to payment of taxes as to which 
immunity under the section has not previously attached. Earnings from 
segregated assets are available for collection of tax, whether 
previously uncollectible under the section or not, after depositors' 
claims against such assets have been paid in full. See paragraph (a) of 
Sec. 301.7507-3 and paragraph (a) of Sec. 301.7507-9.
    (b) Tax computation. The fact that earnings of a given year may be 
wholly or partly unavailable under section 7507 for collection of taxes 
does not exempt the income for that year, or any part thereof, from tax 
liability. The section affects collectibility only, and is not concerned 
with taxability. Accordingly, the taxpayer's income tax return shall 
correctly compute the tax liability, even though in the opinion of the 
taxpayer it is immune from tax collection under the section. The tax 
shall be determined with respect to the entire gross income and not 
merely with respect to the portion of the earnings out of which tax may 
be collected. As to establishment of immunity from tax collection see 
Sec. 301.7507-7.

    Example. (1) An agreement, executed in the year 1954 between a bank 
and its depositors, provides (i) that certain assets are to be 
segregated for the benefit of the depositors who have waived (as claims 
against unsegregated assets of the bank) a percentage of the deposits; 
(ii) that 40 percent of the bank's net earnings, for years beginning 
with 1954, from unsegregated assets, shall be paid to the depositors 
until the portion of their claims waived with respect to unsegregated 
assets of the bank has been paid; and (iii) that the unsegregated assets 
shall not be subject to depositors' claims. The net income of the bank 
for the calendar year 1954 is $10,000, $4,000 produced by the 
segregated, and $6,000 produced by the unsegregated assets. Such amount 
shall be considered the net earnings for the purpose of section 7507 in 
computing the portion of the earnings to be paid to depositors. The bank 
has an outstanding tax liability for prior years of $7,000. The income 
tax liability of the bank for 1954 is 30 percent of $10,000, or $3,000, 
making a total outstanding tax liability of $10,000. The portion

[[Page 557]]

of the earnings of the bank for 1954 remaining after provision for 
depositors is $3,600 ($6,000 less 40 percent thereof, or $2,400). It 
will be assumed that of the total outstanding tax liability of $10,000, 
$3,600 may be assessed and collected, leaving $6,400 to be collected 
from any excess of the segregated assets after claims of depositors 
against such segregated assets have been paid in full. No part of the 
$6,400 immune from collection from 1954 earnings may be collected 
thereafter from unsegregated assets of the bank or earnings therefrom, 
so that except for any possible surplus of the segregated assets the 
$6,400 is uncollectible.

    (2) In the year 1955, the earnings are again $10,000, $4,000 from 
segregated and $6,000 from unsegregated assets, as in 1954. However, the 
return filed shows income of $5,000 and a tax liability of $1,500. An 
investigation shows the true income to be $10,000, on which the tax is 
$3,000. The full $3,000 will be assumed to be collectible. The $600 
difference between $3,600 (the excess of earnings from unsegregated 
assets over the amount going to the depositors), and the $3,000 tax for 
1955, is not available for collection of the tax for prior years, which 
became immune as described above, but may be available for collection of 
tax for subsequent years.

    (c) No significance attaches to the selection of the years 1954 and 
1955 in the example set forth in paragraph (b) of this section. The 
rules indicated by the example are equally applicable to subsequent or 
prior years not excluded by limitations.