Rev. Rul. 73-277

Advice has been requested whether, under the circumstances described below, gain from the sale of the stock of a second tier foreign corporation will constitute "foreign personal holding income" of its first tier corporate shareholder for purposes of the foreign personal holding company provisions (sections 551-558) or the controlled foregin corporations provisions (section 951 through 964) of the Internal Revenue Code of 1954, where the first tier corporate shareholder has adopted a plan of complete liquidation as described in section 337(a) of the Code.

X, a foreign corporation incorporated in country M owns 100 percent of the stock of Y, a foreign corporation incorporated in country R. All of the stock of both X and Y is owned directly or indirectly by three United States citizens who constitute a "United States group" under section 552(a)(2) of the Code. Both X and Y are controlled foreign corporations as defined in section 957 of the Code.

In January 1972, the shareholders of X adopted a plan of complete liquidation as described in section 337(a) of the Code and distributed all of its assets, with the execption of the Y stock, to its shareholders within one year from the date of the adoption of the plan of liquidation. In connection with this plan of liquidation, X sold the stock of Y in February, 1972 to an unrelated third party and realized a gain upon the sale. X distributed the proceeds from the sale of Y's stock to its shareholders within the statutory period specified in section 337(A) of the Code.

Section 337(a) of the Code provides that if a corporation adopts a plan of complete liquidation on or after June 22, 1954, and within the 12-month period beginning on the date of the adoption of such plan, all of the assets of the corporation are distributed in complete liquidation less assets retained to meet claims, then no gain or loss shall be recognized to such corporation from the sale or exchange by it of property within such 12 month period.

One of the requirements for "foreign personal holding company" status, which is stated, in part, in section 552(a)(1) of the Code, is that at least 60 percent of the gross income of the foreign corporation (as defined in section 555(a)) for the taxable year is foreign personal holding company income as defined in section 553.

Section 553(a)(2) of the Code provides, in part, that the term "foreign personal holding company income" means that portion of the gross income, determined for purposes of section 552, which consists of gains from the sale or exchange of stock or securities. Section 555(a) of the Code provides, that for purposes of Part III of Subchapter G of Chapter 1 of Subtitle A of the Code, the term "gross income" means with respect to a foreign corporation, gross income computed (without regard to the provisions of subchapter N (sec. 861 and following)) as if the foreign corporation were a domestic corporation which is a personal holding company.

Section 954(c) of the Code, in defining foreign personal holding company income, which is one component of foreign base company income which in turn is one component of subpart F income as defined in section 952, provides, in part, that the term "foreign personal holding company income" means the foreign personal holding company income (as defined in section 553), modified and adjusted as provided in paragraphs (2), (3), and (4) of section 954(c) of the Code.

Section 1.952-2(c)(3) of the Income Tax Regulations which sets forth one of the rules for the determination of gross income of a foreign corporation for purposes of section 951 through 964 of the Code, provides, in part, that gross income of a foreign corporation includes gain or loss only if such gain or loss would be recognized under the provisions of the Internal Revenue Code if the foreign corporation were a domestic corporation taxable under section 11.

Accordingly, in the instant case, the gain realized by X on the sale of the Y stock, which would not be recognized by X under section 337(a) of the Code if X were a domestic corporation, will not be includible in X's gross income or constitute "foreign personal holding company income" for purposes of the foreign personal holding company provisions (sections 551 through 558) or the controlled foreign corporation provisions (sections 951 through 964) of the Code.