Rev. Rul. 72-529

Advice has been requested whether acquisitions by certain United States banks of debt obligations issued by X, a foreign developed country (not Canada or Japan), under the loan agreement described below are exempt from the interest equalization tax ("IET") pursuant to the provisions of section 4931(c)(1) of the Internal Revenue Code of 1954.

In 1970, country X approved the purchase by M of five aircraft from the manufacturer, a United States corporation. M is a corporation incorporated by country X to supervise and operate the airlines of the country.

X's policy is to borrow from foreign sources, including the United States, 85 percent of the financing required for the purchase of passenger aircraft by M. As a condition of such loans, X requires that 15 percent of the cost of the aircraft be provided from M's cash resources.

The five aircraft ordered by M were delivered in 1971, prior to the time that X was able to secure the financing from United States banks for the purchase of the aircraft. The total purchase price of the five aircraft was approximately 3,000x dollars. The only financing available at that time was the amount of 1,000x dollars from other foreign sources. The balance (2,000x dollars) was satisfied with 1,000x dollars of M's own funds and a temporary advance from X of 1,000x dollars it being contemplated that permanent financing would be necessary as soon as possible.

In 1972, X entered into a loan agreement (the "Agreement") with a United States bank acting as the agent for several United States commercial banks (the "Banks"). The Agreement stipulated that it was being entered into for the purposes of enabling X to assist M in financing the acquisition of the five aircraft. The Agreement was, therefore, made for the purpose of reimbursing X for its temporary advances and for reimbursing M for the amounts that had been used in excess of the 15 percent contribution that M would have normally made with adequate financing. The terms of the debt obligations arising from the transactions were reasonable in light of the credit practices in the business in which the United States manufacturer selling the aircraft was engaged.

Section 4911(a) of the Code provides that the IET is imposed on each acquisition by a United States person (as defined in section 4920(a)(4) of the Code) of stock of a foreign issuer or of a debt obligation of a foreign obligor with a period remaining to maturity of one year or more.

Section 4931(c)(1) of the Code provides, in substance, that the IET shall not apply to the acquisition by a commercial bank of a debt obligation arising out of the sale or lease of personal property or services (or both) if (A) not less than 85 percent of the amount of the loan, amount paid or other consideration given to acquire such debt obligation is attributable to the sale or lease of property manufactured, produced, grown, extracted, created, or developed in the United States, or to the performance of services by United States persons, or both, and (B) the extension of credit and the acquisition of the debt obligation related thereto are reasonably necessary to accomplish the sale or lease of property or services out of which the debt obligation arises, and the terms of the debt obligation are not unreasonable in light of credit practices in the business in which the United States person selling or leasing such property or services is engaged.

The debt obligations acquired by the Banks under the Agreement are debt obligations arising out of the sale of the aircraft, and the extension of credit and acquisition of the debt obligations related thereto by the Banks were necessary to accomplish the sale of the aircraft.

Accordingly, it is held that the acquisitions of such debt obligations by the Banks are excluded from the IET imposed by section 4911 of the Code, pursuant to the provisions of section 4931(c)(1) of the Code.