Rev. Rul. 76-329

Advice has been requested whether, under the circumstances described below, an organization created by a foreign government for the purpose of issuing legal tender notes and coins in that foreign country is exempt from Federal income tax under the provisions of section 892 of the Internal Revenue Code of 1954, on the interest received from its investments in United States Government Treasury Bonds.

Foreign country X enacted legislation in 1974 to create a Currency Board. The Currency Board was established for the purpose of issuing and redeeming country X currency. The law that created the Currency Board, provides that the Currency Board has the sole right to issue legal tender notes and coins of country X. The Currency Board is to establish a Currency Fund to receive all amounts due to and payable by the Board under the provisions of the law. The Currency Board is permitted to buy and sell securities of or guaranteed by the Government of the United States. The United States securities purchased by the Currency Board form part of the reserve for country X currency in circulation.

During 1974, the Currency Board acquired United States Treasury Bonds that resulted in interest income for that year.

The Government of country X certified to the Internal Revenue Service that: (1) The Currency Board is wholly owned and controlled by the Government of X; (2) The Currency Board's assets and income are derived solely from its activities and investments and from the Government of country X; (3) The Board's net income is credited either to itself or to the Government of country X, with no portion of its income inuring to the benefit of any private person; and (4) The Currency Board's investments in the United States include only currencies, fixed interest deposits, stock, bonds, notes, and certain other securities evidencing loans. This certification was made by the Government of country X in accordance with the provisions of Rev. Rul. 75-298, 1975-2 C.B. 290.

Rev. Rul. 75-298 holds, in part, that income earned by a foreign bank that qualifies as a central bank of issue under section 895 of the Code, or by any other organization created by a foreign government that does not engage in the United States in either commercial banking functions as described in section 1.864-4(c)(5)(i) of the Income Tax Regulations or in other commercial activities (on more than a de minimis basis in the United States) qualifies for an exemption from Federal income tax as described in section 892, provided that the foreign government certifies that such bank or other organization meets the following requirements:

1. It is wholly owned and controlled by a foreign government;

2. Its assets and income are derived solely from its activities and investments and from the foreign government;

3. Its net income is credited either to itself or to the foreign government, with no portion of its income inuring to the benefit of any private person; and

4. Its investments in the United States, if any, include only those which produce passive income, such as currencies, fixed interest deposits, stocks, bonds, and notes or other securities evidencing loans.

Section 892 of the Code provides, in part, that income of foreign governments received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments shall not be included in gross income and shall be exempt from Federal income taxation.

Section 895 of the Code provides, in part, that income derived by a foreign central bank of issue from obligations of the United States or any other agency or instrumentality thereof that are owned by such foreign central bank of issue, or derived from interest on deposits with persons carrying on the banking business, shall not be included in gross income and shall be exempt from taxation. However, section 895 provides further that such income will not be exempt from taxation if such obligations or deposits are held for, or used in connection with, the conduct of commercial banking functions or other commercial activities.

Section 1.895-1(b) of the regulations defines a foreign central bank of issue as a bank that is by law or government sanction the principal authority, other than the government itself, issuing instruments intended to circulate as currency.

Section 1.864-4(c)(5)(i) of the regulations provides, in part, that a foreign corporation shall be considered to be engaged in the active conduct of banking if at some time during the taxable year the taxpayer is engaged in business in the United States and the activities of such business consist of any one or more of the following activities carried on, in whole or in part, in the United States in transactions with persons situated within or without the United States: (a) receiving deposits of funds from the public; (b) making personal, mortgage, industrial, or other loans to the public; (c) purchasing, selling, discounting, or negotiating for the public on a regular basis, notes, drafts, checks, bills of exchange, acceptances, or other evidences of indebtedness; (d) issuing letters of credit to the public and negotiating drafts drawn thereunder; (e) providing trust services for the public; or (f) financing foreign exchange transactions for the public.

In the instant case, the interest income of the Currency Board from United States Treasury Bonds qualifies for exemption from taxation pursuant to section 895 of the Code because the bonds that it has invested are not used in connection with the conduct of commercial banking functions or other commercial activities. However, it also qualifies for the broader exemption from taxation pursuant to section 892 because it met the requirements set forth in Rev. Rul. 75-298.

Accordingly, the Currency Board is a central bank of issue not engaged in the United States in either commercial banking functions or other commercial activities as described in section 1.864-4(c)(5)(i) of the regulations. It is further held that the Currency Board is exempt from Federal income taxation under section 892 of the Code.