Rev. Rul. 72-259

The Internal Revenue Service has been requested to explain the applicability of section 4911(a) of the Internal Revenue Code of 1954 under the circumstances described below.

Situation 1. A Canadian obligor issues trust certificates having a maturity date of from one to five years, with an interest rate of 6 percent per annum, to United States persons. These trust certificates are substantially identical to certificates of deposits issued by banks in the United States. Interest is payable semi-annually, or may be compounded semi-annually and paid when the certificates mature. Situation 2. A United States person maintains savings and checking accounts with a Canadian obligor. No checks may be drawn on the savings accounts, but withdrawals may be made from such accounts without notice.

Section 4911(a) of the Code imposes the interest equalization tax on each acquisition by a United States person (as defined in section 4920(a)(4) of the Code) of stock of a foreign issuer, or of a debt obligation of a foreign obligor, if such obligation has a period remaining to a maturity of one year or more.

Section 4920(a)(1) of the Code provides, in relevant part, that the term "debt obligation" means any indebtedness, whether or not represented by a bond, debenture, note, certificate, or other writing, whether or not secured by a mortgage, and whether or not bearing interest.

Pursuant to section 4917 of the Code, the regulations thereunder, and the relevant Executive Order, an acquisition by a United States person of stock or debt obligations of a Canadian issuer or obligor will be exempt from the interest equalization tax if such stock or debt obligations are all or part of an original or new issue and timely notice of acquisition is filed on Form 3779. Section 4917(c) of the Code defines the term new or original issue.

Executive Order No. 11304, C.B. 1966-2, 482, amending Executive Order No. 11175, C.B. 1964-2, 460, provides in relevant part that any acquisition of stock or a debt obligation of a Canadian corporation, partnership, or trust formed or availed of for the principal purpose of acquiring stock or debt obligations of a Canadian or other foreign issuer or obligor, other than a new or original Canadian issue or stock or debt obligations described in section 4916(a) of the Code, is subject to the interest equalization tax.

The trust certificates in Situation 1 are "debt obligations" within the meaning of section 4920(a)(1) of the Code and have a period remaining to maturity of one year or more. Accordingly, the acquisition of the certificates is subject to the tax imposed by section 4911(a) of the Code.

The acquisition of these trust certificates will be exempt pursuant to section 4917 of the Code and Executive Order No. 11175, as amended by Executive Order No. 11304, unless the Canadian obligor is "formed or availed of" for the purpose proscribed by Executive Order No. 11304.

In this connection, United States persons who acquire these trust certificates may be asked to satisfy the Service that the Canadian obligor is not "formed or availed of" for the proscribed purpose above. If when asked the United States person does not satisfy the Service, the exemption will be disallowed.

Section 4920(a)(7)(B)(iv) of the Code provides that any debt obligation which is payable on demand (including any bank deposit) shall be considered to have a period remaining to maturity of less than one year.

Savings and checking accounts from which withdrawals may be made at any time are debt obligations which are payable on demand. Therefore, they are considered to have a period remaining to maturity of less than one year, for purposes of the interest equalization tax.

Accordingly, in Situation 2, the opening and maintaining of such savings or checking accounts with the Canadian obligor by a United States person are not acquisitions subject to the interest equalization tax.

However, listed below are examples of debt obligations which are not payable on demand within the purview of section 4920(a)(7)(B)(iv) of the Code:

(a) A bank deposit, which on its face is a demand deposit, where there is an agreement or an understanding, expressed or implied, that the funds will remain on deposit for one year or more;

(b) A deposit with respect to which the obligor has agreed to pay interest at a stated percent if the funds remain on deposit for one year or more, but a lower rate of interest (or no interest) if the funds are withdrawn before one year;

(c) A demand deposit or loan made in circumstances which will result in the lender suffering a detriment of one sort or another if repayment is demanded in less than one year;

(d) A demand loan or deposit which has been made for a specific purpose which does not permit repayment in less than one year.