Rev. Rul. 72-289

Advice has been requested if, under the circumstances described below, the acquisition of stock by a transferee-taxpayer is entitled to exemption under section 4918 of the Internal Revenue Code of 1954 where foreign stock was acquired directly from a transferor who at the time of such acquisition had not satisfied his interest equalization tax (IET) liability with respect to the stock.

The taxpayer, a United States person, acquired foreign stock from the transferor, a domestic corporation, on January 15, 1969. On that date, the transferor had established neither that it had paid the IET with respect to the acquisition of such stock nor that it had acquired such stock without liability for payment of such tax. For that reason, the taxpayer was not able to establish IET exemption under the conclusive proof provision, section 4918(b)(1) of the Code, prior to the due date for filing his Interest Equalization Quarterly Tax Return (Form 3780). On April 30, 1969, the taxpayer timely filed his return for the calendar quarter in which his acquisition of the foreign stock occurred as required by section 6011(d) of the Code, and paid the tax.

Approximately four months after the transferor had disposed of the foreign stock, a settlement agreement was completed between the Internal Revenue Service and the transferor on May 10, 1969, which had the effect of establishing that it either had paid the IET or had acquired such stock without liability for payment of the IET under section 4918(a)(2) of the Code. Shortly thereafter the taxpayer filed a claim for a refund of the IET he had paid. The taxpayer established that the above facts were the reason for his inability to establish exemption under the conclusive proof provisions of section 4918(b)(1) of the Code, and furnished satisfactory evidence to show that the transferor either had paid the IET with respect to the stock acquired by the transferee on January 15, 1969 or had acquired such stock without liability for payment of such tax.

Section 4918 of the Code provides, in part, as follows.

"(a) General Rule--The tax imposed by section 4911 shall not apply to an acquisition of stock of a foreign issuer or a debt obligation of a foreign obligor if it is established in the manner provided in this section that--

(1) the person from whom such stock or debt obligation was acquired was a United States person throughout the period of his ownership or continuously since July 18, 1963 and was not ineligible, under the provisions of this chapter, to dispose of such stock or debt obligation as a United States person, and

(2) such person--

(A) had paid the tax imposed by section 4911 with respect to the acquisition of such stock or debt obligation by such person; or

(B) acquired such stock or debt obligation without liability for payment of such tax.

(b) Establishing Exemption for Prior American Ownership and Compliance--

(1) Conclusive proof--For purposes of the exemption for prior American ownership and compliance provided in subsection (a)--

(A) a validation certificate, evidencing that the person from whom stock of a foreign issuer or a debt obligation of a foreign obligor was acquired was a person described in subsection (a), issued by the Secretary or his delegate (or by any officer or employee of the United States designated by the Secretary or his delegate) and filed in accordance with the requirements prescribed by the Secretary or his delegate; or

(B) a written confirmation (referred to as an IET clean confirmation) received by the person acquiring such stock or debt obligation from a participating firm acting as a broker in effecting the acquisition (or acting for its own account) which contains no reference to liability for the tax imposed by section 4911, shall be conclusive proof that such exemption applies with respect to the acquisition of the stock or debt obligation described in such certificate or confirmation, if the person making the acquisition relies in good faith on the validity of such certificate or confirmation.

(2) Other proof--if the person making an acquisition of stock or a debt obligation shows reasonable cause for his inability to establish such exemption under paragraph (1) he may furnish other evidence to establish to the satisfaction of the Secretary or his delegate that such exemption is applicable to such acquisition."

Section 4918 of the Code was intended to assure that only one tax will be paid on acquisition of foreign stock or debt obligations, so long as continuous American ownership is maintained. See House Report No. 1046, Eighty-eighth Congress, C.B. 1964-2, 708 at pages 749 and 750. Later amendments to section 4918 of the Code, so that it reads as indicated above (P.L. 90-59, Ninetieth Congress, C.B. 1967-2, 482 at page 485), made tax compliance by the United States transferor necessary in order for an acquisition of stock by the transferee to be exempted under such section. However, there is no requirement in section 4918 of the Code that compliance by the transferor occur prior to the time the transferee acquires foreign securities from the transferor.

Under the stated facts, the transferee taxpayer showed reasonable cause for his inability to establish IET exemption under paragraph (1) of section 4918(b) of the Code with respect to his acquisition made on January 15, 1969. He also furnished satisfactory evidence establishing that the transferor either had paid the IET with respect to the stock acquired on January 15, 1969 or had acquired such stock without liability for payment of such tax.

Accordingly, the taxpayer was entitled to a refund since the acquisition of stock on January 15, 1969, by the taxpayer was exempt from IET, the taxpayer having established in the manner provided in section 4918(b)(2) of the Code that the requirements for exemption under section 4918(a) of the Code had been met.