Rev. Rul. 73-75

Advice has been requested concerning the proper base that is to be used in imposing the interest equalization tax, under the circumstances described below.

The taxpayer is a domestic corporation that sells its products through branch offices in various foreign countries. Interest equalization tax liability is incurred by the taxpayer upon the receipt of debt obligations, having a period to maturity of one year or more, from certain foreign customers for goods manufactured outside the United States and sold under installment sales contracts.

The contracts stipulate the selling price of the property sold, allowances for deposits paid and merchandise traded-in, and the principal amount due. The contracts also show, in a single amount, the carrying charges that are added to the principal to arrive at the total amount expected to be paid over the period of the contracts. Payments under the contracts are to be made monthly. The amount of the carrying charges varies depending on the length of the repayment periods.

The specific question presented is whether the base upon which the interest equalization tax is to be imposed includes the carrying charges.

Section 4911(b)(1)(B) of the Internal Revenue Code of 1954 provides that the tax imposed by subsection (a) on the acquisition of a debt obligation (if such obligation has a period remaining to maturity of one year or more) of a foreign obligor by a United States person shall be equal to a percentage of the actual value of the debt obligation measured by the period remaining to its maturity and determined under the table set forth therein.

No regulations have been promulgated under section 4911 of the Code interpreting the term "actual value." The House of Representatives Report No. 1046, Equalization Tax Act of 1963, Public Law 88-563, Eighty-eighth Congress, 1964-2 C.B. 708 at 724, provides, in part, however, "In general, actual value is determined by the consideration paid by a purchaser in an arm's length transaction. In no event will the actual value of any stock or debt obligation acquired be considered to be less than the actual value of the money or other property paid for such stock or debt obligation."

Accordingly, in the instant case, the base upon which the interest equalization tax is imposed is the selling price of the product, less allowances for deposits paid and merchandise traded-in. The carrying charges are not included in such base, provided that they are reasonably related to the actual costs of carrying the obligation.