Rev. Rul. 72-298

Advice has been requested whether, under the circumstances described below, a taxpayer is subject to the interest equalization tax on an acquisition of foreign securities.

The taxpayer, a United States citizen, acquired, through a foreign stock broker, stock of foreign issuer M on June 1, 1970, for a total of 400x dollars. The interest equalization tax imposed by section 4911 of the Internal Revenue Code of 1954 on this acquisition was timely paid by the taxpayer.

On January 1, 1971, the taxpayer, through his foreign stock broker, sold the M stock for 400x dollars and on that same day acquired stock of foreign issuer P for the total amount of 600x dollars which was its actual value. Of this amount (600x dollars) only 200x dollars represented additional funds being transmitted by the taxpayer outside the United States since the 400x dollars received from the sale of M stock was reinvested through the foreign stock broker in P stock. The acquisition of P's stock is subject to the interest equalization tax imposed by section 4911 of the Code.

The specific question is whether the taxpayer in the instant case is required to pay an interest equalization tax on the full amount invested in P stock, 600x dollars, or whether the interest equalization tax is imposed only upon the additional funds being transmitted outside the United States, that is, 200x dollars.

Section 4911(a) of the Code provides for the imposition of a tax determined under section 4911(b) of the Code, 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 one year or more.

Revenue Ruling 66-268, C.B. 1966-2, 479, provides, in part, that any acquisition of a foreign security, whether occurring within or outside the United States, by a United States person, is subject to the interest equalization tax pursuant to section 4911 of the Code, unless one or more specific statutory exemption or exclusions is applicable. The source or currency of the funds used to make such acquisition, or the fact that funds are not used at all is not the basis for any statutory exemption or exclusion.

In the instant case the taxpayer used funds situated outside the United States as well as funds situated within the United States to acquire P stock on January 1, 1971. As indicated in Revenue Ruling 66-268, the source of funds used in making such acquisition is of no significance in a determination of the interest equalization tax consequences of that acquisition.

Accordingly, the taxpayer in the instant case is subject to an interest equalization tax based on the actual value of the stock acquired, that is, 600x dollars.

Whether an acquisition of time deposits by a domestic corporation from a foreign financial institution in a triangular financing situation is excluded from interest equalization tax under section 4915(a) of the Code. See Rev. Rul. 72-299, page 358.