Rev. Rul. 71-187

Advice has been requested as to the application of the tax imposed by section 4911 of the Internal Revenue Code of 1954 (the Interest Equalization Tax (hereinafter "IET")) to the following transaction.

M, a Canadian corporation, proposes to sell 20x dollars of a new issue of its stock to X, a United States person.

M's principal business activities include the drilling for oil and gas, the sale of oil, gas, and natural gas, the fabricating of equipment, and the providing of certain related services. M conducts these activities almost exclusively through subsidiaries. At least 90 percent of M's underlying assets are assets which are held in its subsidiaries in which it owns at least 80 percent of all classes of stock of each subsidiary. These subsidiaries are operating companies that have either been formed by M or acquired through acquisitions of stock for cash or shares of stock. The stock of these subsidiaries was obtained solely for the purpose of having the operations of the subsidiaries integrated with the operations of M. The management has also been integrated as operating divisions. M has not acquired these businesses for investment purposes and has not actively traded any of the stock of the subsidiaries which it presently owns.

The primary purpose of M's issuance of the stock is to provide it with cash for its expansion program, including the expansion of existing businesses and the possible acquisition of new businesses by the purchase of substantially all of the stock or assets of operating companies. M will operate such new businesses as divisions or subsidiaries.

At least 90 percent of M's assets before issuance of its new stock consists of operating assets; stock or debt obligations of United States persons; stock or debt obligations described in section 1 of Executive Order 11304, dated September 12, 1966, C.B. 1966-2, 482; stock or debt obligations described in section 4916(a) of the Code; and, stock outstanding of Canadian or other foreign corporations where all or substantially all (80 percent or more of all classes of stock) of the stock of the corporation is owned by M.

Where any part of the funds acquired by M through the issuance of the new stock is to be used by M to acquire stock or debt obligations of foreign corporations (other than those described in section 1 of Executive Order 11304 or in section 4916(a) of the Code) M will, within twelve months of such initial acquisition, own at least 80 percent of all classes of stock of such corporation. No part of the funds described above will be used by M to acquire stock or debt obligations of foreign issuers or obligors described in section 2 of Executive Order 11304.

In general, section 4911 of the Code imposes the IET on the acquisition by a United States person (as defined in section 4920(a)(4)) of stock of a foreign issuer or of a debt obligation of a foreign obligor (if such obligation has a period remaining to maturity of one year or more).

Section 4917 of the Code, as implemented by Executive Orders 11175, dated September 2, 1964, C.B. 1964-2, 460, and 11304, supra, provides in substance that the acquisition by a United States person of original or new issues of Canadian stock or debt obligations shall be exempt from the IET if the corporation is not formed or availed of for the principal purpose of acquiring stock or debt obligations of a Canadian or other foreign issuer or obligor other than stock or debt obligations exempt as described under section 1 of Executive Order 11304 or section 4916(a) of the Code.

Section 147.4-1(c)(2) of the Temporary Regulations provides, in part, that each United States person claiming an exclusion from the IET on the acquisition of an original or new issue of Canadian stock or debt obligations, in accordance with E.O. 11304, shall timely file the notice of acquisition required on Form 3779 with the Commissioner of Internal Revenue) Attention: Treasury, IET).

The specific question raised by the facts presented is whether M is formed or availed of for the proscribed purposes set forth in section 2 of Executive Order 11304.

In light of (1) the composition of M's assets both before and after the proposed issuance of the new stock issue and (2) the manner in which M will use the proceeds from the proposed issuance of the stock, it is concluded that M is not considered formed or availed of for the proscribed purposes set forth in section 2 of Executive Order 11304. Accordingly, the acquisition of the new stock by X, a United States person, is exempt from the IET if X timely files Form 3779 with the Commissioner of Internal Revenue.