Rev. Rul. 70-238

The purpose of this Revenue Ruling is to update and restate under the current statute and regulations, the position set forth in I.T. 3757, C.B. 1945, 200.

The question presented is whether the creation of a new domestic corporation to carry on the business in the Western Hemisphere (other than in the United States) of an existing domestic corporation is tax avoidance within the meaning of section 269 of the Internal Revenue Code of 1954, where the new corporation was created for the principal purpose of gaining the benefits provided by section 922 of the Code.

Section 922 of the Code provides for a special deduction in computing the taxable income of a Western Hemisphere trade corporation defined in section 921 of the Code.

Section 269 of the Code provides, in part, that if (1) any person or persons acquire, or acquired on or after October 8, 1940, directly or indirectly, control of a corporation, or (2) any corporation acquires, or acquired on or after that date, directly or indirectly, property of another corporation, not controlled, directly or indirectly, immediately before such acquisition, by such acquiring corporation or its stockholders, the basis of which property, in the hands of the acquiring corporation, is determined by reference to the basis in the hands of the transferor corporation, and the principal purpose for which such acquisition was made is evasion or avoidance of Federal income tax by securing the benefit of a deduction, credit, or other allowance which such person or corporation would not otherwise enjoy, then the Secretary of the Treasury or his delegate may disallow such deduction, credit, or other allowance.

The special deduction provided by section 922 of the Code (originally enacted as section 26(i) of the 1939 Code by section 122(c) of the Revenue Act of 1950) was intended primarily to grant relief, similar to that afforded by section 15(b) of the 1939 Code (Senate Report No. 1631, Seventy-seventh Congress, second session, C.B. 1942-2, 504, 532), to American corporations trading in foreign countries within the Western Hemisphere. In granting this relief Congress sought to make such relief available to any domestic corporation, provided only that it could satisfy the specific requirements of section 921 of the Code.

The deliberate creation of a subsidiary, or the organization of a subsidiary's business and sales procedure, for the express purpose of qualifying it as a Western Hemisphere Trade Corporation does not amount to tax avoidance. Barber-Greene Americas, Inc. v. Commissioner, 35 T.C. 365 (1959), acquiescence, C.B. 1964-2, 4; Pan American Eutectic Welding Alloys Co., Inc. v. Commissioner, 36 T.C. 284 (1960), acquiescence, C.B. 1964-2, 6.

Accordingly, it is held that the creation of a new domestic corporation to carry on the business in the Western Hemisphere (other than in the United States) of an existing domestic corporation is not tax avoidance, within the meaning of section 269 of the Code, even though the new corporation was created for the principal purpose of gaining the benefits provided by section 922 of the Code.

I.T. 3757 is hereby superseded, since the position stated therein is restated under current law in this Revenue Ruling.

¹ Prepared pursuant to Rev. Proc. 67-6, C.B. 1967-1, 576.