Rev. Rul. 72-417

Advice has been requested whether the interest equalization tax imposed by section 4911 of the Internal Revenue Code of 1954 applies to the transactions described below and whether a Validation Certificate of Prior American Ownership and Interest Equalization Tax Compliance (Form 4322) will be issued with respect to such transactions.

A United States person died leaving a last will and testament. An executor of the estate was appointed and was duly certified by the court having jurisdiction. At the time of his death, the decedent owned stocks of foreign issuers which he had purchased and which passed to the estate by operation of law. The estate subsequently sold such stock to other United States persons.

Section 4911(a) of the Code provides, in relevant part, that the interest equalization tax 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.

Section 4914(a)(2) of the Code provides that any transfer described in section 4343(a) (relating to certain transfers by operation of law from decedents, minors, incompetents, financial institutions, bankrupts, successors, foreign governments and aliens, trustees and survivors) as in effect on January 1, 1965, shall not be included in the term "acquisition."

Section 4918(a) of the Code provides, in relevant part, that the tax imposed by section 4911 of the Code shall not apply to an acquisition of stock of a foreign issuer if it is established that (1) the person from whom such stock was acquired was a United States person throughout the period of his ownership or continuously since July 18, 1963, and was not ineligible, under the provisions of chapter 41A of the Code, to dispose of such stock as a United States person; and (2) such person had paid the tax imposed by section 4911 of the Code with respect to the acquisition of such stock by such person, or acquired such stock or debt obligation without liability for payment of such tax.

Accordingly, since the transfer of the stock, in the instant case, from the decedent to the estate by operation of law is excluded from the term "acquisition" by virtue of section 4914(a)(2) of the Code, such transfer is not subject to the interest equalization tax imposed by section 4911(a) of the Code. A Validation Certificate of Prior American Ownership and Interest Equalization Tax Compliance (Form 4322) will therefore not be issued with respect to such transfer.

Whether the tax imposed by section 4911 of the Code is applicable to the sale of the stock to other United States persons (as defined in section 4920(a)(4) of the Code) by the estate would depend upon whether the requirements of section 4918(a) of the Code were met, i.e., whether (1) the estate was a United States person throughout the period of its ownership of the stock or continuously since July 18, 1963, and it was not ineligible under the provisions of chapter 41A of the Code, to dispose of such stock as a United States person, and (2) the estate had paid the tax imposed by section 4911 of the Code with respect to the acquisition of such stock by it, or acquired the stock without liability for payment of the tax.

For purposes of requirement (2) above, the transfer by operation of law from the decedent to the estate does not establish that the estate acquired the stock without liability for payment of the tax because the transfer does not constitute an "acquisition" for purpose of the imposition of the tax. Therefore, the executor must furnish proof that the last transfer of the stock which was an "acquisition," for purposes of imposing the tax, i.e., the purchase of the stock by the decedent, met requirement (2) above. The executor must furnish proof that the decedent had either paid the tax with respect to his purchase of the stock, or that the decedent had purchased the stock without liability for payment of the tax.

Accordingly, if the executor furnishes proof that requirements (1) and (2) above have been met, Form 4322 will be issued to the estate with respect to the sale and the tax imposed by section 4911 of the Code will not apply to such sale. If the executor is unable to furnish proof that such requirements have been met, Form 4322 will not be issued with respect to the sale and the tax imposed by section 4911 of the Code will be imposed with respect to the acquisition of such stock by other United States persons from the estate.