Rev. Rul. 72-501

Advice is requested as to the interest equalization tax (IET) consequences of the transactions described below, to a domestic corporation, under section 4911(a) of the Internal Revenue Code of 1954.

In 1970, a domestic corporation, under a so-called parallel financing arrangement, made a ten year loan in United States dollars to a domestic partnership formed for the purpose of holding and investing funds in the United States for a foreign pension fund. At the same time, the foreign pension fund made a loan in foreign currency, on substantially the same terms, to a wholly-owned foreign subsidiary of the domestic corporation. Neither the domestic partnership nor the foreign subsidiary has used any of the proceeds of the respective loans to acquire stock of a foreign issuer or debt obligations of a foreign obligor.

Section 4911(a) of the Code imposes the IET on the acquisition by a United States person of a debt obligation of a foreign obligor (having a period remaining to maturity of one year or more).

Section 4912(b)(3) of the Code provides, in part, that the acquisition of stock or a debt obligation of a domestic partnership formed or availed of for the principal purpose of obtaining funds directly or indirectly for a foreign obligor shall be deemed an acquisition from such foreign obligor of stock or a debt obligation of such foreign obligor.

Section 4915(a) of the Code provides, in effect, that a United States person is not liable for the IET on an acquisition of stock or a debt obligation of a foreign corporation if immediately after such acquisition the United States person owns directly or indirectly 10 percent or more of the total combined voting power of all classes of stock of such foreign corporation.

However, section 4915(c)(1) of the Code provides, in effect, that exemption from the IET under section 4915(a) of the Code is not applicable where a foreign corporation is formed or availed of by the United States person for the principal purpose of acquiring, through such corporation, an interest in debt obligations of a foreign obligor the direct acquisition of which by the United States person would be subject to the IET.

In the instant case, the domestic corporation is deemed to have acquired the debt obligation of a foreign obligor, pursuant to section 4912(b)(3) of the Code, inasmuch as the loan by the domestic corporation to the domestic partnership was made for the principal purpose of obtaining funds for its foreign subsidiary. However, in the instant case, the domestic corporation owns ten percent or more of all of the voting stock of its foreign subsidiary, and, none of the proceeds of either of the loans involved have been used to acquire stock of a foreign issuer or debt obligations of a foreign obligor.

In order to warn United States persons who acquire an interest in, or the debt obligations of, the domestic partnership of IET liability, the partnership placed a legend on the evidences of interest in the partnership and on its debt obligations which read, as applicable, substantially as follows:

UNITED STATES INTEREST EQUALIZATION TAX

The issuer of this debt obligation [or partnership interest] has been formed or availed of for the principal purpose of obtaining funds (directly or indirectly) for foreign issuers or foreign obligors. The United States Internal Revenue Service has ruled that United States persons (as that term is defined in Section 4920(a)(4) of the U.S. Internal Revenue Code of 1954) will be required to report and pay United States interest equalization tax with respect to acquisition of this debt obligation [or partnership interest] except where a specific statutory exemption is applicable.

Accordingly, it is held, in this case, that the domestic corporation is exempt from the interest equalization tax on its acquisition of the debt obligation of its foreign subsidiary (as a result of its loan to the domestic partnership), under the provisions of section 4915(a) of the Code, provided that section 4915(c)(4) of the Code (relating to situations where a foreign corporation or partnership is subsequently availed of for tax avoidance) and section 4915(d) (relating to acquisitions made with intent to sell to United States persons) do not apply.