Rev. Rul. 72-288

Advice has been requested whether the term "acquisition" includes a distribution by a foreign corporation of its stock to a shareholder pursuant to section 4914(a)(4) of the Internal Revenue Code of 1954 under the circumstances described below. The foreign corporation manufactures certain products in a foreign country for sale throughout the world. Its shares of common stock are listed on various European stock exchanges and are traded in the over-the-counter market in the United States. At the option of each shareholder of the corporation, the 1970 dividend declared was paid in cash or in additional shares of common stock (at the rate of one additional share for each 25 shares owned). Shareholders who did not make an election by May 31, 1971 received a cash distribution.

Most United States shareholders have elected to receive common shares rather than cash since the current market value of common shares of stock exceeded the cash dividend that they would have otherwise been entitled to receive.

Section 4911(a) of the Code imposes the interest equalization tax 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 if such obligation has a period remaining to maturity of one year or more.

Section 4912(a) of the Code, provides, in part, that for purposes of the interest equalization tax, the term "acquisition" means any purchase, transfer, distribution, exchange, or other transaction by virtue of which ownership is obtained either directly or through a nominee, custodian, or agent.

Section 4914(a)(4) of the Code provides that the term "acquisition" shall not include any distribution by a corporation of its stock or debt obligations to a shareholder with respect to or in exchange for its stock.

House Report No. 1046, Eighty-eighth Congress, First Session, C.B. 1964-2, at 731, provides, in part, that section 4914(a)(4) of the Code excludes from the term "acquisition", any distribution by a corporation of its stock or debt obligations to a shareholder with respect to or in exchange for its stock. "Thus, a stock dividend, distribution of rights, or any other distribution to a shareholder of the distributing corporation's stock or debt obligations--in connection with a reorganization, liquidation, or redemption, or otherwise--is a transfer which is not considered an acquisition, whether or not it is subject to Federal income tax." (Emphasis added.)

In view of the foregoing, any distribution by a corporation of its stock to a shareholder with respect to its stock would be excluded from the term "acquisition" notwithstanding the fact that the distribution could have been paid in cash if the shareholder had so elected.

Accordingly, it is held that the distribution which the foreign corporation made to its shareholders in additional common shares at their individual election will not be considered an "acquisition" of its common stock for purposes of section 4912(a) and section 4914(a)(4) of the Code.