Rev. Rul. 73-119

Advice has been requested whether, under the circumstances described below, section 955 of the Internal Revenue Code of 1954 is applicable.

X, a domestic corporation, owns all of the stock of Y, incorporated under the laws of S which is a possession of the United States and a less developed country. Y, in turn, is a holding company holding all of the stock of a less developed country corporation (LDCC) and desires to invest its income only in qualified investments in less developed country corporations. Y proposes to invest in interest-bearing notes secured by mortgages on real estate in country S which are not obligations of a less developed country corporation but which are insured or guaranteed by the Federal Housing Administration or the Veterans Administration which are instrumentalities of the United States Government.

Section 955(b)(1)(C) of the Code defines "qualified investment in less developed countries" as including "an obligation of a less developed country."

Section 1.955-2(a)(3) of the Income Tax Regulations lists as one of the categories of property constituting "qualified investments in less developed countries" an obligation of a less developed country including obligations issued or guaranteed by the government of such country, or a political subdivision thereof, and obligations of any agency or instrumentality of such country, in which such country is financially committed.

Section 955(c)(3) of the Code defines a less developed country as meaning (in respect of any foreign corporation) any foreign country (other than an area within the Sino-Soviet block) or any possession of the United States designated by the President in an Executive Order as an economically less developed country. For purposes of the preceding sentence, a possession may be treated as a separate country. No designation as a less developed country may be made with respect to various foreign countries listed in the statute.

Section 1.955-4 of the regulations provides, in part, that each territory, department, province, or possession of any foreign country (other than a country within the Sino-Soviet bloc) may be treated as a separate foreign country for purposes of such designation if the territory, department, province, or possession is overseas from the country of which it is a territory, department, province, or possession. Thus, for example, an overseas possession of a foreign country may be designated by Executive Order as an economically less developed country even though the foreign country itself has not been designated as an economically less developed country, or the foreign country may be so designated even though the overseas possessions of such country have not been designated as economically less developed countries.

The United States Government is acting in its own capacity in guaranteeing or insuring the mortgages and not as the government of possession S within the meaning of section 1.955-2(a)(3) of the regulations.

Accordingly, it is held that the notes in the instant case secured by mortgages on real estate located in S are not qualified investments in less developed countries as defined in section 955(b) of the Code.