Rev. Rul. 72-416

Advice has been requested whether the holdings in Revenue Ruling 69-377, C.B. 1969-2, 231, are equally, applicable to the circumstances described below.

X, a domestic corporation, formed Y, also a domestic corporation, as a wholly owned subsidiary. X contributed shares of its one class of common stock having a net fair market value of not less than 5,000 X dollars to the capital of Y. The common stock of X is traded daily on the stock exchange. The stock transferred to Y is not subject to any restrictions. In order to provide funds for the development of the business of certain of X's foreign affiliates, Y sold 25,000 X dollars of 20-year debt obligations to foreign persons through a public offering in foreign countries and invested in or loaned to the foreign affiliates of X the funds thus derived.

Payments of the principal and interest on the debt obligations are guaranteed by X, so that in the event Y fails to make any such payments on time, X will cause such payment to be made.

In Revenue Ruling 69-377, the facts are the same as above except that cash was contributed by the domestic parent to its wholly-owned domestic financing subsidiary instead of the parent's common stock.

Revenue Ruling 69-377 holds that since the domestic financing subsidiary was formed or availed of for the principal purpose of obtaining funds for a foreign issuer or obligor pursuant to section 4912(b)(3) of the Internal Revenue Code of 1954, the stock and the debt obligations issued by the subsidiary are deemed to be the stock of such foreign issuer or the debt obligations of such foreign obligor. Therefore, the acquisition by United States persons of such stock or debt obligations of the subsidiary is subject to the interest equalization tax unless one or more specific statutory exemptions is applicable.

Revenue Ruling 69-377 further holds that under section 4915(a) of the Code, subject to the exceptions set forth in sections 4915(c) and 4915(d) of the Code, the interest equalization tax does not apply to the acquisition by the domestic financing subsidiary of the stock or debt obligations of a foreign corporation, if the subsidiary or its domestic parent owns 10 percent or more of the total combined voting power of all classes of stock of such foreign issuer or obligor immediately after such acquisition, and the domestic parent and its domestic subsidiary constitute an affiliated group pursuant to section 1504 of the Code. Furthermore, since the debt obligation of the domestic financing subsidiary have all the indicia of bona fide indebtedness, the interest paid by the subsidiary on its debt obligations is deductible under section 163(a) of the Code so long as such debt obligation is held by a person other than its domestic parent or one of the parent's affiliates. Moreover, no United States withholding of tax under section 1441 or 1442 of the Code is required on the interest from the domestic financing subsidiary's debt obligations paid to nonresident alien individuals, foreign partnerships or foreign corporations, if less than 20 percent of the subsidiary's gross income has been derived from sources within the United States pursuant to sections 861 through 864 of the Code.

Finally, Revenue Ruling 69-377 states that whether a debt obligation issued by the domestic subsidiary, if acquired by its parent or one of the parent's affiliates or if the parent or one of the parent's affiliates makes any payment of principal or intreest on such debt obligation pursuant to the parent's guaranty to make payments of principal and interest in the event that the subsidiary fails to make such payments, is bona fide indebtedness and whether interest paid or accrued on such debt obligation by the parent or one of its affiliates is deductible are questions to be determined on the basis of all the facts and circumstances of each case.

Since X's common stock is daily traded on the stock exchange, it has a readily ascertainable value. Therefore, it is immaterial whether cash or the common stock of X is contributed to Y.

Accordingly, the holdings in Revenue Ruling 69-377 are equally applicable in the instant case.

Revenue Ruling 69-377 is hereby amplified.