Rev. Rul. 72-500

Advice has been requested whether the acquisition of certain foreign debt obligations, under the circumstances described below, is subject to the interest equalization tax imposed by section 4911(a) of the Internal Revenue Code of 1954.

N, a domestic corporation, is engaged in the manufacturing business in the United States. S, its wholly owned domestic subsidiary, provides financial assistance to N's customers in connection with purchases from N and from other manufacturers that incorporate N's product in their products. N and S are affiliated within the meaning of section 1504(a) of the Code and S is included in the consolidated Federal income tax return of the affiliated group of which N is the common parent corporation.

O, an unrelated domestic corporation, uses an item manufactured by N in producing its own product in the United States. O obtained orders for the export sale of this product. N sold its items for use by O in filling the order for export sale of the O's product. N also sold its manufactured items directly to the foreign purchasers for use as spare parts for the O product.

S, pursuant to a credit agreement, provided financial assistance to foreign purchasers of O's product and N's spare parts by loaning them two-thirds of the value of N's items involved in the transactions described on a 10-year term at 6 percent interest. The credit agreement stated that S would provide such financing only in the event that the purchases were made.

Section 4911(a) of the Code provides, in general, that a tax, determined under subsection (b), is imposed on each acquisition by a United States person 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 1 year or more).

Section 4914(c)(2) of the Code provides that the tax imposed by section 4911(a) of the Code shall not apply to the acquisition by a United States person from a foreign issuer or obligor of its stock in payment for, or of a debt obligation arising out of, the sale of tangible personal property or services (or both) to such issuer or obligor, if (1) at least 30 percent of the purchase price, or 60 percent of the actual value of the stock or debt obligation acquired, is attributable to the sale of property manufactured, produced, grown, or extracted in the United States by such United States person (or by one or more includible corporations in an affiliated group, as defined in section 1504 of the Code, of which such person is a member), or to the performance of services by such United States person (or by one or more of such corporations), or to both and; (2) at least 50 percent of the purchase price, or 100 percent of the actual value of the stock or debt obligation acquired, is attributable to the sale of property manufactured, produced, grown, or extracted in the United States, or to the performance of services by United States persons, or to both.

S was a member of an affiliated group, as defined by section 1504 of the Code, of which N was also a member. Thus, if N would qualify for exemption from tax under section 4914(c)(2) of the Code for acquisitions of debt obligations arising out of purchases of N's product by foreign corporations, S will qualify for exemptions from tax on such acquisitions. Furthermore, since S acquired obligations from the foreign corporations in an amount equal to two-thirds of the value of the goods N produced that were sold to such foreign corporations (either directly, or indirectly as a part of O's product), the entire value of the obligations was attributable to goods that were produced by N, a United States person, within the United States. Thus, more than 60 percent of the value of the obligations acquired by S was attributable to goods manufactured by N in the United States and 100 percent of the value of the obligations was attributable to goods produced in the United States by virtue of the fact that the obligations were, in their entirety, attributable to goods produced by N in the United States.

Accordingly, since the acquisition of the debt obligations by S in the instant case meet the requirements of section 4914(c)(2) of the Code, such acquisitions are not subject to the interest equalization tax imposed by section 4911(a) of the Code.