Rev. Rul. 69-501

Advice has been requested whether the transactions described below will qualify as a direct investment for the purposes of section 4915 of the Internal Revenue Code of 1954.

X, a domestic corporation, formed N, a foreign subsidiary corporation, for the purpose of providing working capital and funds for expansion of X's business both in the United States and abroad through its other affiliates. To accomplish this financing N sold 20-year debt obligations to underwriters for offer and sale to the public outside the United States. The proceeds from the sale of these debt obligations were loaned to X and invested in and loaned to certain of X's affiliated companies at interest by N. The debt obligations of N are convertible into the capital stock of X. Payment of the principal and interest on the debt obligations are guaranteed by X.

Before the date on which the debt obligations were issued by, N, X purchased all of the capital stock of N for an amount of cash equal to 20 percent of the principal amount of the total debt obligations to be issued by N. The money used by X to make this investment in N was borrowed from a foreign financial institution. Upon receipt of this money from X, N deposited said money with the same foreign financial institution. N's right to withdraw the money so deposited was not contingent upon repayment of the loan incurred by X from that same foreign financial institution, nor was this deposit to be considered as collateral for repayment of X's loan.

Section 4911 of the Code imposes the interest equalization tax on each acquisition by a United States person of stock of a foreign issuer, or a debt obligation of a foreign obligor, if such obligation has a period remaining to maturity of one year or more. Section 4915(a) of the Code provides, in relevant part, that the tax imposed by section 4911 of the Code shall not apply to the acquisition by a United States person of stock or debt obligation 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 of such foreign corporation.

Subsection (c) of section 4915 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.

Subsection (d) of section 4915 of the Code provides that section 4915(a) of the Code shall be inapplicable in any case where the acquisition of stock or debt obligations of the foreign corporation is made with intent to sell, or to offer to sell, any part of the stock or debt obligations acquired to United States persons.

Accordingly, it is held that under section 4915(a) of the Code, subject to the exceptions set forth in sections 4915(c) and (d) of the Code, the interest equalization tax does not apply to the acquisition by X of the stock or debt obligations of N, since in the instant case X owns more than 10 percent of the total combined voting power of all classes of stock issued by N, immediately after the acquisition of such stock. However, any other United States person acquiring the debt obligations of N will be subject to the tax imposed by section 4911 of the Code unless a specific exemption or exclusion is applicable. Furthermore, any acquisition of the capital stock of X into which the debt obligations are convertible, whether upon conversion or from any other person, will not be subject to the tax imposed by section 4911 of the Code. For the purpose of section 4919 of the Code a United States person acting as a dealer or underwriter with respect to the debt obligations may avail himself of the credit or refund therein provided the applicable requirement of such section and the temporary regulations thereunder are met.