Rev. Rul. 73-375

Advice has been requested whether an acquisition by the taxpayer of debt obligations which will be issued under the loan agreement described below is exempt from the interest equalization tax ("IET") pursuant to the provisions of section 4931(c)(1) of the Internal Revenue Code of 1954.

The taxpayer, a domestic corporation, was organized under state law as an "investment company" and is engaged in international and foreign commercial banking. Such activities include acting as correspondent for foreign and domestic banks to hold, pay, and receive funds in settlement of their international transactions, receiving and transferring funds for foreign non-bank clients; handling domestic and foreign collections, engaging in import and export financing by issuing and confirming letters of credit, and by acceptance financing as well as participating in various programs of the Export-Import Bank of the United States; buying and selling securities for clients on their instructions and acting as custodian of clients' securities; granting credit accommodations, secured and unsecured, for export-import financing, selling short-term notes issued by foreign and domestic business entities to foreign and domestic clients; executing foreign exchange transactions for clients and for its own account; and purchasing government and municipal securities for its own account.

In connection with the foregoing, the taxpayer regularly receives cash and checks from its customers and maintains credit balances for the account of its customers. Customers may draw upon such balances by drafts which are cleared daily through a clearing house in the same manner as checks drawn on all other commercial banks.

The taxpayer's assets are devoted exclusively to the banking business. All of its business activities are, by law, supervised and examined by the state banking department and reports are submitted to the Federal Reserve Bank.

X is a corporation organized and existing under the laws of foreign country that is a developed country (not Canada or Japan). X will borrow directly from the taxpayer 3,000x dollars under a loan agreement. The taxpayer will have the option under the agreement of arranging participation in the loan with correspondent commercial banks in the United States.

The proceeds to be received by X under the loan agreement will be used to cover the purchase of farm machinery manufactured in the United States and its shipment to the foreign country. The loan will be repayable in semi-annual installments during a three-year term with interest on the unpaid balances. The farm machinery will be purchased from the domestic manufacturer of such machines. In all, 87 percent of the amount of the loan given is attributable to the sale of property manufactured in the United States.

The extension of credit to X and the acquisition of the debt obligations related thereto by the taxpayer are reasonably necessary to accomplish the purchase of United States goods by X. The terms of the debt obligations arising from the transaction are reasonable in the light of the credit practices in the business in which the United States manufacturer selling the farm machinery was engaged.

Section 4911(a) of the Code provides that the IET 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 or a debt obligation of a foreign obligor with a period remaining to maturity of one year or more.

Section 4931(c)(1) of the Code provides, in substance, that the IET shall not apply to the acquisition by a commercial bank of a debt obligation arising out of the sale or lease of personal property or services (or both) if (A) not less than 85 percent of the amount of the loan, amount paid or other consideration given to acquire such debt obligation is attributable to the sale or lease of property manufactured, produced, grown, extracted, created, or developed in the United States, or to the performance of services by United States persons, or both, and (B) the extension of credit and the acquisition of the debt obligation related thereto are reasonably necessary to accomplish the sale or lease of property or services out of which the debt oglibation arises, and the terms of the debt obligation are not unreasonable in light of credit practices in the business in which the United States person selling or leasing such property or services is engaged.

In the instant case, the facts disclose that the taxpayer, although organized as an "investment company," has sufficient characteristics of a commercial bank to be considered as such for purposes of section 4931(c)(1) of the Code. The debt obligations which the taxpayer will acquire under the loan agreement are debt obligations which will arise out of the sale of the farm machinery, and the extension of credit and acquisition of the debt obligations related thereto by the taxpayer are necessary to accomplish the sale of the farm machinery.

Accordingly, since the taxpayer is considered to be a commercial bank for the purposes of section 4931(c)(1) of the Code, the acquisition by the taxpayer of the debt obligations of X arising out of the purchase of equipment produced in the United States will be excluded from the IET imposed by section 4911 of the Code, pursuant to the provisions of section 4931(c)(1) of the Code.