Rev. Rul. 72-586

Advice has been requested concerning the Interest Equalization Tax consequences of the transactions described below.

Z, a wholly-owned foreign financing subsidiary of domestic corporation Y, is organized for the purpose of obtaining funds abroad to finance investments by Y in European banking and financial institutions.

To accomplish the financing, Z raised 12x dollars abroad through foreign borrowings and the issuance of bonds, principal and interest thereon being guaranteed by Y. On or before the date on which the borrowings were secured or the bonds were issued, Y contributed cash and other property to Z in exchange for its stock in a sufficient amount so that on such date, and at all times thereafter, the equity capital of Z was not less than 20 percent of the principal amount of its indebtedness. Some of the proceeds of the borrowings and bond issues were invested in or loaned to foreign banking and financial institutions in which Z owned, directly or indirectly, less than 10 percent of the voting shares.

Section 4915(a)(1) of the Internal Revenue Code of 1954 provides, in part, that except as provided in subsection (c) and (d) of such section, the Interest Equalization Tax shall not apply to the acquisition by a United States person of stock or a debt obligation of a foreign corporation, if immediately after the acquisition such person owns (directly or indirectly) 10 percent or more of the total combined voting power of all classes of stock of such foreign corporation.

Section 4915(c)(1) of the Code provides, in part, that the provisions of subsection (a) and (b) of section 4915 shall be inapplicable in any case where the foreign corporation is formed or availed of by the United States person for the principal purpose of acquiring, through such corporation, an interest in stock or debt obligations of one or more foreign issuers or obligors the direct acquisition of which by the United States person would be subject to the tax imposed by section 4911 of the Code.

Section 4912(b)(2)(A)(i) of the Code provides, in part, that any transfer of money or other property to a foreign corporation as a contribution to the capital of such corporation, shall be deemed an acquisition by the transferor of stock of a foreign corporation in an amount equal to the actual value of the money or property transferred.

Section 4913(b) of the Code provides, in part, that the tax imposed by reason of a transfer of money or other property to a foreign corporation, as described in section 4912(b)(2)(A) of the Code shall be limited to the amount of tax imposed by section 4911 of the Code, less the amount of tax paid by the transferor as the result of the transfer being otherwise taxable as an acquisition under this chapter.

Since Z was formed by Y for the principal purpose, within the meaning of section 4915(c)(1) of the Code, of acquiring through Z, an interest in stock or debt obligations of one or more other foreign issuers or obligors, the direct acquisition of which by Y would be subject to the Interest Equalization Tax, the provisions of subsection (a) of section 4915 of the Code are inapplicable. Accordingly, the acquisition by Y of the stock of Z is subject to the Interest Equalization Tax in an amount based upon the actual value of Z's stock. The nature and amount of other foreign stock or debt obligations acquired by Z, after the acquisition by Y of the stock of Z, has no effect on the "actual value of" Z's stock at the time of acquisition by Y.

Furthermore, the transfer of money or property from Y to Z as a contribution to the capital of Z is (to the extent not otherwise taxable under section 4911 of the Code as a direct acquisition of foreign stock), pursuant to section 4912(b)(2)(A)(i) of the Code, deemed to be an acquisition by Y of stock of Z in an amount equal to the actual value of the money or other property transferred.