Rev. Rul. 71-599

Advice has been requested whether a United States person who is a dealer in securities, as defined in section 4919(c)(2) of the Internal Revenue Code of 1954, may inventory foreign securities on a "first-in, first-out" basis, as opposed to an item-by-item tracing, to show that the requirements of timely disposition and evidence thereof, as provided in sections 4919(a)(2) and (3) of the Code and section 147.6-1(d)(2) of the Temporary Regulations under the Interest Equalization Tax Act, have been met. Advice has also been requested whether such a dealer may submit a statement from a participating firm or participating custodian meeting the eligibility requirements in section 4918(c) and (f) of the Code that such firm or custodian has on record the name of the foreign person who is the purchaser of foreign securities, in lieu of identification of such purchaser by name and address, in order that the dealer through who the firm or custodian purchased the securities may fulfill the requirement to show sale of the foreign securities to a foreign person, as required by section 147.6-1(d)(2) of the regulations.

Sections 4919(a)(2) and (3) of the Code, as amended, provide, in relevant part, that the tax paid under section 4911 of the Code on the acquisition of stock or debt obligations of a foreign issuer or obligor shall constitute an overpayment of tax to the extent that such stock or debt obligations consist of stock or debt obligations consist of stock or debt obligations acquired by a dealer in the ordinary course of his business and sold by him, within the period specified, to persons other than United States persons, or to another dealer who resells them within specified time limits to persons other than United States persons.

Section 4919(b)(1) of the Code provides, in part, that a credit or refund shall be allowed to a dealer under subsection (a) with respect to any stock or debt obligation sold by him only if the dealer files with the return required by section 6011(d) of the Code on which credit is claimed, or with the claim for refund, such information as the Secretary or his delegate may prescribe by regulations, and establishes that such stock or debt obligation was sold to a person other than a United States person.

Section 147.6-1(d)(2) of the regulations sets forth the required information which a dealer must submit in order to receive a credit or refund. In Part, it is there required that information be submitted concerning the date of each acquisition of stock of a foreign issuer or a debt obligation of a foreign obligor, the date of each such sale, and in the case of a sale of stock or debt obligations directly to foreign persons, the names and addresses of such persons.

Section 147.6-1(d)(2) of the regulations does not provide the method of record keeping that may be used in establishing the timely sale specified in sections 4919(a)(2) and (3) of the Code. A "first-in, first-out" method of inventory may be proper in establishing the timely sales required by sections 4919(a)(2) and (3) of the Code provided the inventory is limited to securities which are sold to persons other than United States persons and provided: (a) a separate Foreign Purchase and Sales Blotter is maintained, from which each transaction with respect to a separate foreign security is posted on an inventory control ledger established for each class of foreign stock and debt obligation, and (b) on a monthly basis, each such control ledger contains the opening inventory, the date of each acquisition and sale made during the month, and the ending inventory.

Accordingly, for purposes of determining the timely disposition of foreign stock or debt obligations, as relevant to sections 4919(a)(2) and (3) of the Code, and for evidence to support a claim for credit or refund as provided in section 147.6-1(d)(2) of the regulations, dealers in securities as defined in section 4919(c)(2) of the Code, may inventory foreign stock or debt obligations using the "first-in, first-out" method provided the individual securities are properly recorded on a monthly basis.

Section 4919(a) of the Code was amended by the Interest Equalization Tax Extension Act of 1971 to authorize the President by Executive order to extend the period of two business days specified in section 4919(a)(3) of the Code to not exceed 13 calendar days in the case of acquisitions of stock made for customers and not for investment purposes by dealers who have submitted to the Secretary of the Treasury or his delegate a satisfactory procedure identifying which of their acquisitions are for customers and which are for investment purposes. Since acquisitions to which this Executive order will apply may not be acquisitions which become part of a dealer's general inventory, that part of this Revenue Ruling concerning the use of the "first-in, first-out" inventory method is inapplicable to acquisitions of stock to which the Executive order may apply.

Section 147.6-1(d)(2)(vi) of the regulations provides that in the case of a direct sale to a foreign person the dealer is required to furnish the name and address of the foreign person who bought the foreign stock or debt obligations. Section 147.6-1(d)(2)(vii) through (ix) of the regulations sets out the special information to be submitted in connection with certain other types of sales. The procedures under the interest equalization tax regulations do not cover the situation where the foreign person makes a purchase from a United States dealer through a participating firm or a participating custodian acting as its agent.

Under sections 4918(c) and (f) of the Code participating firms and custodians agree to comply with the provisions of Chapter 41 of the Code, relating to interest equalization tax, and the documentation, record keeping, reporting and auditing requirements prescribed by the Secretary or his delegate to implement such provisions. Sections 4918(e) and (h) of the Code provide circumstances in which documents issued by or records kept by a participating firm or custodian are relied on (directly or indirectly) by the Internal Revenue Service to provide the basis for conclusive evidence of exemption from interest equalization tax under section 4918(b)(2) of the Code. It would appear appropriate to allow a participating firm or a participating custodian not to disclose the name and address of the foreign buyer provided the dealer is furnished from the participating firm or custodian a certified statement that (a) it acquired the foreign security solely as agent for a foreign person, (b) it maintains in its records evidence to establish the identity of the foreign person for whom it is acting and information relative to the amount of the securities, certificate numbers, if any, name of obligor, description of the securities, and date of acquisition by the participating firm or custodian of such securities, and (c) it will make such records and information available for inspection by authorized Internal Revenue officers or employees.

Accordingly, in the case of a sale of securities by a dealer to a participating firm or custodian meeting the eligibility requirements under section 4918(c) or (f) of the Code and acting as agent for a foreign person, a certified statement containing the information above furnished to the dealer by a participating firm or custodian can be used in meeting the requirements of section 147.6-1(d)(2) of the regulations for evidence to support a claim under section 4919 of the Code for credit or refund by such dealer.