Rev. Rul. 71-490

The Federal Home Loan Banks ("FHLB's") are instrumentalities of the United States organized and existing under the authority of the Federal Home Loan Bank Board, as provided by the Federal Home Loan Bank Act of 1932, Public Law 304, Seventy-second Congress, 12 U.S.C. 1421 et seq. Although the shareholders of the FHLB's are private savings and loan institutions, the Federal Government, through the Federal Home Loan Bank Board, rather than the shareholders, exercises control over the policies of the FHLB's. As part of this control, FHLB's are not permitted to distribute substantial dividends to their shareholders. Dividends may be distributed by a FHLB only in accordance with rules of the Federal Home Loan Bank Board and such rules limit the dividends to less than the market rate of interest on the capital invested by the shareholders.

Subject to the regulations of the Federal Home Loan Bank Board, the FHLB will acquire and hold for its own account debt obligations of a foreign obligor, with a period remaining to maturity of one year or more, which represent foreign housing project loans. The loans have the benefit of a full faith and credit guaranty by the United States, acting through the Agency for International Development ("A.I.D.") under sections 221-223 of The Foreign Assistance Act of 1961, Public Law 87-195, as amended by Public Law 91-175, 22 U.S.C. 2181-2183.

With the prior approval of the Federal Home Loan Bank Board, the FHLB will sell participation interests, in such foreign debt obligations, to the extent of approximately ninety-five percent of such housing project loans to certain United States persons, such as United States savings and loan associations and other Federal Home Loan Bank members (hereinafter referred to as "Participants"). Some participation interests will be contracted for sale by FHLB prior to the execution of the loan agreement. After FHLB acquires the debt obligations, the participation interests contracted for sale and as many more as FHLB is able to sell (up to the limits described above in this paragraph) will be sold to the Participants. The FHLB will remain obligated to advance funds under the loan agreement whether or not there are any such sales to the Participants. The participation interests will be evidenced by participation certificates which will be transferable solely among such Participants.

The participation interest will be a percentage of the debt obligations acquired by FHLB from the foreign obligor. All payments received from the foreign obligor on account of the debt obligations or from A.I.D. under the A.I.D. guaranty agreement are immediately due and payable to the Participants in respect of their participation interests. The Participants may not look to FHLB for payment on the participation interests beyond the amount actually received by FHLB from the foreign obligor, a guarantor, or as a result of foreclosure on any security interest securing the foreign debt obligation. FHLB will alone administer and enforce the foreign loan and the guaranty on behalf of the Participants, but FHLB cannot, without the written consent of such Participants, take any action which would vary the obligations of the foreign obligor or any guarantor to pay principal and interest when due or release any security interest.

Section 13 of the Federal Home Loan Bank Act of 1932, as amended (12 U.S.C. 1433), provides in part, that a Federal Home Loan Bank, including its franchise, its capital reserves, and surplus, its advances and its income, shall be exempt from all taxation now or hereafter imposed by the United States, by any Territory, dependency, or possession thereof, or by any State, county, municipality or local taxing authority.

Held, based on section 13 of the Federal Home Loan Bank Act of 1932, the acquisition by the FHLB of the debt obligations representing the A.I.D. guaranteed housing loans will not be subject to the interest equalization tax imposed by section 4911(a) of the Internal Revenue Code of 1954.

Held further, under section 4918(a) of the Code, the acquisition by a Participant of a participation interest from the FHLB or from another Participant will not be subject to the interest equilization tax, provided the application of section 4918(a) of the Code has been established in the manner provided in section 4918.