Rev. Proc. 71-1

Section 1. Purpose.

The purpose of this Revenue Procedure is to furnish advice concerning the effect of section 4.011(b) of Revenue Procedure 64-54, C.B. 1964-2, 1008, on advances by a United States controlling taxpayer to its controlled foreign subsidiary corporation under the circumstances described below.

Sec. 2. Facts.

In 1961, X corporation, a United States controlling taxpayer, advanced dollars, at no interest, to Y manufacturing corporation, a controlled foreign subsidiary corporation of X, for the purpose of having Y contribute it to the capital of Z, a newly formed corporation, all of the stock of which was owned by Y, for use by Z to acquire the manufacturing business and assets of M, an unrelated foreign corporation. Z made the acquisition in 1961, and has operated the business formerly operated by M since that time. The dollars advanced (determined to be a loan and not a contribution to capital of Y) remained unpaid during X's taxable years 1961 and 1962 and was carried as an open account receivable on the books of X and an open account payable on the books of Y.

Sec. 3. Background.

Section 4.011(b) of Revenue Procedure 64-54, as amended by Revenue Procedure 66-33, C.B. 1966-2, 1231, provides, in part, that for taxable years of the United States controlling taxpayer beginning prior to January 1, 1965, the Internal Revenue Service will not make allocations under section 482 of the Internal Revenue Code of 1954 to reflect a charge for the use of funds loaned or otherwise advanced by a United States controlling taxpayer to its controlled foreign entity unless, and to the extent that, the controlled foreign entity used funds borrowed from or advanced by the United States controlling taxpayer to invest in "income producing securities" (unless such income is of a type not here involved).

Sec. 4. Conclusion.

The exception set forth in section 4.011(b) of Revenue Procedure 64-54 relating to a controlled foreign entity using funds borrowed or advanced by the United States controlling taxpayer to invest in "income producing securities" is directed at investments in portfolio-type income producing securities, and not investments in connection with the acquisition of all of the stock of a corporation, as in the instant case.

Accordingly, relief from the application of section 482 of the Code provided by section 4.011(b) of Revenue Procedure 64-54 is applicable for the taxable years 1961 and 1962 with respect to the advancement of funds by X to Y.

Where the funds loaned or advanced are invested by the controlled foreign entity in connection with the acquisition of less than all of the stock of a corporation, the applicability of section 4.011(b) of Revenue Procedure 64-54 will be determined on a case by case basis.

Sec. 5. Effect on Other Documents.

Revenue Procedure 64-54 is supplemented.