Rev. Rul. 72-434

Advice has been requested whether, under the circumstances described below, the taxpayer is considered to be an issuer of debt obligations for purposes of section 4912(c)(1) of the Internal Revenue Code of 1954.

Y, a wholly-owned domestic subsidiary of domestic corporation X, the taxpayer, issued debt obligations and made an election under section 4912(c) of the Code to subject such obligations to the interest equalization tax. Under the terms of the obligations, the holders are entitled to exchange them at specified times for stock of X.

The specific question presented is whether X is considered to be the issuer, under section 4912(c)(1) of the Code, when it acquires Y's debt obligations upon conversion.

Section 4912(c)(1) of the Code provides that a domestic corporation may elect to have its debt obligations which are part of a new or original issue treated as debt obligations of a foreign obligor the acquisition of which by a United States person (other than the issuer) will be subject to the tax imposed by section 4911 of the Code at the rate applicable on acquisitions of stock under section 4911(b) of the Code.

Section 147.10(a) of the Temporary Income Tax Regulations provides, in pertinent part, that an acquisition pursuant to a right to convert or exchange a debt obligation for stock or in discharge of the obligation of a guarantor shall be treated as an acquisition by the issuer, provided such right or guarantee arises no later than the time such obligation first becomes subject to an election under section 4912(c) of the Code.

It is held that X is considered to be the issuer, under section 4912(c)(1) of the Code, when it acquires Y's debt obligations upon conversion. X is not considered as having acquired the debt obligations of a foreign obligor and, therefore, such acquisition is not subject to the interest equalization tax upon such conversion.