Rev. Rul. 69-361

Advice has been requested whether dividend income from United States sources derived by a board of governors that administers a hospital owned by a foreign government is exempt from Federal income tax under section 892 of the Internal Revenue Code of 1954.

A foreign government owns and operates certain hospitals. The funds for this purpose are appropriated out of its national treasury. A cabinet official has title to all hospital property; however, each hospital is administered by a separate board of governors. Each board of governors, in a separate legal capacity, acts as trustee of funds or assets that have been donated or bequeathed to the hospital by private persons to be used for purposes relating to hospital services. In general, such funds provide for hospital services and research beyond those provided by the amount appropriated by the government. Under the law of the foreign government, these funds are not government funds. Subject to the terms of the gift or the will under which received, and subject to certain legal and fiscal controls imposed by the government, these funds may be invested and spent at the discretion of the trustees.

The trustees in this case hold stock in United States corporations, some of which was acquired by gift and some of which was acquired by investment of the donated funds. The board of governors of the foreign government's hospital has requested exemption from United States income tax under section 892 of the Code, with respect to the dividend income from such stock.

Section 892 of the Internal Revenue Code provides, in pertinent part, as follows:

"The income of foreign governments * * * received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments * * * or from interest on deposits in banks in the United States of moneys belonging to such foreign governments * * * or from any other source within the United States, shall not be included in gross income and shall be exempt from taxation under this subtitle."

In general, section 892 of the Code provides an exemption from Federal income tax for the income of foreign governments. The section makes it clear that a foreign government is exempt from United States income tax with respect to income earned from the investment or deposit of securities or funds owned by such foreign government, but the exemption does not extend to income from funds or securities not actually owned by the foreign government. For example, section 1.892-1(a) of the Income Tax Regulations provides that the exemption does not apply to income collected by a foreign government from investments in the United States from securities that are not actually owned by, but are loaned to, the foreign government.

Accordingly, in this case, the dividend income derived from investments in stock of United States corporations by the board of governors in its legal capacity as trustee of donated funds that are not owned by the foreign government is not exempt from tax under section 892 of the Code.