Rev. Rul. 74-202

Advice has been requested concerning the date on which the interest begins to accrue for purposes of section 4917(c)(2) of the Internal Revenue Code of 1954 under the circumstances described below.

In 1970, an agency of a Canadian province issued a series of sinking funds bonds in the principal amount of 30x dollars (U.S.). The bonds are dated July 1, 1970, and will mature July 1, 1980. One-third of the principal amount of the bonds was issued on July 9, 1970 ("First Closing"), and two-thirds of the principal amount were issued on October 9, 1970 ("Second Closing") to United States underwriters. Interest on the bonds, whether such bonds were delivered at the first or second closing, ran from July 1, 1970. Payment for the bonds was made by United States underwriters at the respective closings against delivery of the bonds. The price of the bonds included interest from July 1, 1970.

Section 4911 of the Code imposes the interest equalization tax on the acquisition by a United States person (as defined in section 4920(a)(4)) of a debt obligation of a foreign obligor that has a period remaining to maturity of one year or more.

Section 4917 of the Code and Executive Order 11304, 1966-2 C.B. 482, provide an exclusion from the interest equalization tax for an acquisition by a United States person of original or new issues of foreign debt obligations, if the foreign obligor is an agency or a subdivision of the Canadian Government, and if notice of the acquisition is filed as prescribed by the Secretary of the Treasury or his delegate. Section 4917(c)(2) and section 147.4-1(b)(2) of the Temporary Regulations under the Interest Equalization Tax Act provide that for purposes of section 4917, a debt obligation, whether or not acquired from the obligor, shall be treated as part of an original or new issue only if acquired not later than 90 days after the date on which interest begins to accrue on such debt obligation. In addition, a notice of acquisition on Form 3779 (Notice of Acquisition of Original or New Canadian Stock or Debt Obligation) setting forth the information required by such form shall be timely filed in the manner prescribed under section 147.4-1(c) of the Temporary regulations.

Interest on indebtedness begins to accrue at the time the liability giving rise to the interest is in existence. Interest, when computed from a date prior to the issue date of an obligation, does not accrue until the obligation is in existence. The obligation first exists when by reason of a transaction between the issuer and the acquirer there has developed a relationship of debtor and creditor. See Commissioner v. Philadelphia Transportation Company, 174 F. 2d 255 (3rd Cir. 1949), aff'd per curiam, 338 U.S. 883 (1949).

Accordingly, for purposes of section 4917 of the Code, although the interest on the bonds issued in both closings was computed from July 1, 1970, the interest on the bonds in the first closing began to accrue on July 9, 1970, and the interest on the bonds issued in the second closing began to accrue on October 9, 1970. Therefore, the bonds issued to underwriters in both closings were acquired not later than 90 days after the date on which the interest began to accrue. If separate notices of acquisition, Form 3779, were timely filed for each closing for which the exclusion was claimed, the requirements of section 4917 and Executive Order 11304 were satisfied with respect to each closing and the acquisitions of the debt obligations are not subject to the interest equalization tax imposed by section 4911.