Rev. Rul. 73-335

Advice has been requested whether, under the circumstances described below, an acquisition by a United States person of a debt obligation of a wholly owned domestic subsidiary of a foreign corporation is subject to the provisions of section 4912(b)(3) of the Internal Revenue Code of 1954 and deemed an acquisition of the debt obligation of such foreign corporation.

M, a foreign corporation, wholly owns the one class of stock of X, a domestic corporation. X has agreed to acquire 100 percent of the one class of stock of T, a domestic operating corporation, for cash. To finance a portion of the cost of the acquisition of T's stock, X borrowed a certain amount from domestic banks for a term of five years with M guaranteeing payment of principal and interest.

The acquisition of T by X is for the purpose of actively conducting the trade or business of X by utilizing the management and marketing resources of T. The loan proceeds received by X from domestic banks will not be transferred directly or indirectly to M.

Section 4911(a) of the Code imposes the interest equalization tax on each acquisition by a United States person of the stock of a foreign issuer, or a debt obligation of a foreign obligor, if such debt obligation has a period remaining to maturity of one year or more.

Section 4912(b)(3) of the Code provides, in relevant part, that the acquisition of stock or a debt obligation of a domestic corporation formed or availed of for the principal purpose of obtaining funds (directly or indirectly) for a foreign issuer or obligor, shall be deemed an acquisition (from such foreign issuer or obligor) of stock or debt obligation of such foreign issuer or obligor.

H.R. Rep. No. 1046, 88th Cong., 1st Sess. 29 (1963), 1964-2 C.B. 708, 727, states, in part, that the rule provided by section 4912(b)(3) of the Code will not apply to a domestic corporation which obtains capital to be used by it in the active conduct of its own business even though the corporation may be wholly owned by a foreign issuer or obligor. It further states that the acquisition and holding of investments is not the active conduct of a trade or business for this purpose.

Since the purpose of the loan is to provide X with cash to acquire the stock of T, and the acquisition of the stock of T is not for investment purposes but for the purpose of actively conducting X's trade or business, and since none of the proceeds of the loan will be transferred directly or indirectly to M, X is not considered under section 4912(b)(3) of the Code as formed or availed of for the principal purpose of obtaining funds directly or indirectly for M, a foreign issuer or obligor. Accordingly, the acquisition by the domestic banks of X's debt obligations in connection with the loans used to acquire all of T's stock is not subject to interest equalization tax provided for under section 4911.