Rev. Rul. 72-187

Advice has been requested whether, under the circumstances described below, the undistributed foreign personal holding company income of a foreign personal holding company is deemed an acquisition by the stockholder, a United States person, of stock in such foreign corporation and, therefore, subject to the interest equalization tax.

The taxpayer, a United States citizen, is the sole owner of the outstanding stock of X, a foreign personal holding company. X was organized for the purpose of purchasing stock of foreign issuers and debt obligations of foreign obligors with moneys it received from the taxpayer on his initial capital contribution. Subsequent purchases of such stock and debt obligations were made possible by additional advances by the taxpayer, in cash or marketable securities, and by retaining the undistributed foreign personal holding company income.

Section 551(e) of the Internal Revenue Code of 1954 provides that for the purpose of determining the effect of distributions in subsequent taxable years by the foreign personal holding company, the undistributed foreign personal holding company income of such company which is required to be included in the gross income of United States shareholders shall be considered as paid-in surplus or as a contribution to capital, and the accumulated earnings and profits as of the close of the taxable year shall be correspondingly reduced.

Section 4911 of the Code imposes, in part, the interest equalization tax on each acquisition by a United States person of stock of a foreign issuer.

Section 4912(b)(2)(A)(i) of the Code provides, in relevant part, that any transfer of money or other property to a foreign corporation as a contribution to the capital of such corporation shall be deemed an acquisition by the transferor of stock of a foreign corporation in an amount equal to the actual value of the money or property transferred.

Section 4915(a) of the Code provides, in part, that the interest equalization tax imposed by section 4911 of the Code shall not apply to the acquisition by a United States person of stock or debt obligations of a foreign corporation if immediately after the acquisition such person owns directly or indirectly 10 percent or more of the total combined voting power of all classes of stock in such foreign corporation.

Section 4915(c)(1) of the Code provides that section 4915(a) of the Code shall be inapplicable in any case where the foreign corporation is formed or availed of by the United States person for the principal purpose of acquiring, through such foreign corporation, an interest in stock or debt obligations of one or more other foreign issuers or obligors, the direct acquisition of which by the United States person would be subject to the interest equalization tax imposed by section 4911 of the Code.

In the instant case, X was formed by the taxpayer for the principal purpose of acquiring, through X, an interest in stock and debt obligations of other foreign issuers or obligors, the direct acquisition of which by the taxpayer would be subject to the interest equalization tax. Therefore, the exemption provided under section 4915(a) of the Code will not apply by reason of section 4915(c)(1) of the Code.

The language of section 551(e) of the Code limits the purpose for which undistributed foreign personal holding company income shall be treated as a contribution to capital, namely, to eliminate the possibility of double taxation of the undistributed foreign personal holding company income when actual distributions of such income are made in subsequent years, and does not purport to treat such contributions of capital as the acquisition of any additional portfolio interest in foreign securities for purposes of section 4912 of the Code.

Accordingly, the undistributed foreign personal holding company income of X which is treated as a contribution to X's capital to the extent required to be included in the taxpayer's gross income is not deemed, under section 4912(b)(2)(A)(i) of the Code, an acquisition by the taxpayer of X's stock and, therefore, is not subject to the interest equalization tax imposed by section 4911 of the Code. However, the actual advances by the taxpayer, in cash or marketable securities, in the instant case, will be treated, under section 4912(b)(2)(A)(i) of the Code, as an acquisition by the taxpayer of X's stock and subject to the interest equalization tax imposed by section 4911 of the Code.