Rev. Rul. 68-401

Advice has been requested whether a domestic corporation that sells foreign securities to a United States person is precluded from acquiring validation certificates with respect to such securities, pursuant to section 4918 of the Internal Revenue Code of 1954, merely because the corporation's previous acquisition of the securities was exempt from the interest equalization tax under section 2(c)(7) of the Interest Equalization Tax Act, Public Law 88-563, C.B. 1964-2, 615, at 643.

Pursuant to the exemption from the interest equalization tax provided by section 2(c)(7) of the Act, X , a domestic corporation (within 180 days after the enactment of the Act and pursuant to a reorganization described in section 368(a)(1)(D) of the Code) acquired all of the assets of Y , a foreign management company registered under the Investment Company Act of 1940 prior to July 19, 1963. Prior to the reorganization X established to the satisfaction of the Commissioner of Internal Revenue that the transaction was not in pursuance of a plan having as one of its principal purposes the avoidance of Federal income taxes within the meaning of section 367 of the Code.

X now proposes to sell some of the foreign securities acquired in the reorganization to A , a United States person, and to acquire validation certificates under section 4918 of the Code with respect to the securities. X has maintained its status as a United States person, as defined in section 4920(a)(4) of the Code, during the entire period of its ownership of the foreign securities.

Section 2(c)(7) of the Act provides that the interest equalization tax shall not apply to the acquisition by a domestic corporation of the assets of a foreign corporation pursuant to a reorganization described in subparagraph (D), (D), or (F) of section 368(a)(1) of the Code, if the acquisition occurs on or before the 180th day after the date of the enactment of the Act and the foreign corporation was a management company registered under the Investment Company Act of 1940 from July 18, 1963, until the time of the acquisition.

Section 4918(a) of the Code provides, in relevant part, that the interest equalization tax imposed by section 4911 of the Code shall not apply to an acquisition of stock of a foreign issuer if it is established that the person from whom such stock was acquired was a United States person throughout the period of his ownership and was not ineligible, under the provisions of Chapter 41 of the Code, to dispose of such stock as a United States person and such person had paid the tax imposed by section 4911 of the Code with respect to the acquisition of such stock by such person, or acquired such stock without liability for payment of such tax.

The effect of the exemption from the interest equalization tax provided by section 4918(a) of the Code is to assure that only one tax will be paid on stock or debt obligations acquired after July 18, 1963, and that no tax will be paid on those acquired prior to that date, so long as continuous American ownership is maintained. See House Report No. 1046, Eighty-eighth Congress, First Session, C.B. 1964-2, 708 , at 749.

It is held that a domestic corporation that sells foreign stock is not precluded from acquiring validation certificates with respect to such stock pursuant to section 4918 of the Code merely because the domestic corporation's previous acquisition of the stock was exempt from the interest equalization tax under section 2(c)(7) of the Act.

Accordingly, X may acquire validation certificates with respect to the foreign securities in the instant case upon their sale to A and therefore such acquisition is not subject to the interest equalization tax.