Rev. Rul. 77-41

Advice has been requested concerning the applicability of sections 892, 893, and 4372 of the Internal Revenue Code of 1954 to the organization described below.

X, a financial organization created under laws of foreign country A, is wholly owned and controlled by foreign governments A, B, C, and D. X was established to foster economic, financial, and technical cooperation between various foreign nations.

X is not able to exercise independently any substantial powers that will be binding on its member countries.

X proposes to invest its funds in the United States in stocks and bonds of domestic corporations, United States treasury bills, and other domestic securities and seeks an exemption from Federal income tax pursuant to section 892 of the Code on the income derived from such investments.

Section 892 of the Code provides, in part, that the income of foreign governments or international organizations received from investments in the United States in stocks, bonds, or other domestic securities, owned by such foreign governments, or by international organizations, or from interest on deposits in the United States of moneys belonging to such foreign governments or international organizations, or from any other sources within the United States shall not be included in gross income and shall be exempt from Federal income taxation.

Section 1.892-1(b)(2) of the Income Tax Regulations provides, in part, that a public international organization designed by Presidential Executive order as entitled to enjoy the privileges, exemptions, and immunities provided under the International Organizations Immunities Act is entitled to the benefits of section 892 of the Code, if, among other requirements, the United States participates in such organization pursuant to a treaty or under the authority of an act of Congress authorizing such participation.

Rev. Rul. 75-298, 1975-2 C.B. 290, provides, in part, that income earned by an organization created by a foreign government that does not engage in commercial activities in the United States (on more than a de minimis basis) qualifies for the exemption from Federal income taxation described in section 892 of the Code, provided such organization is wholly owned and controlled by a foreign government and also meets certain other requirements stated therein.

Rev. Rul. 68-309, 1968-1 C.B. 338, provides that a number of foreign governments may qualify for an exemption under section 892 of the Code where such governments collectively constitute a foreign government within the meaning of section 892.

Whether the exemption from Federal tax provided by section 892 of the Code applies to X depends upon whether Rev. Rul. 75-298 applies to an organization owned by a number of foreign governments or, in the alternative, whether X, an international body, constitutes an international organization or a foreign government eligible for exemption under section 892.

Rev. Rul. 75-298 states that the exemption provided by section 892 of the Code applies to organizations created by a foreign government. (emphasis added)

Where a number of foreign government form an organization that is not itself considered to be a foreign government, an exemption may not be granted to the organization under section 892 of the Code unless the organization qualifies as an international organization within the meaning of section 892. Section 892 grants exemptions only to foreign governments individually and to international organizations of which the United States is a member and that have been designated by appropriate Executive order as being entitled to an exemption under section 892. Other international organizations are not entitled to an exemption even though the individual member governments may qualify for the exemption. H. Rep. No. 1203, 79th Cong., 1st Sess., page 1, November 12, 1945, with respect to the amendment of section 116(c) of the Internal Revenue Code of 1939 (the predecessor of section 892 of the 1954 Code) to add to that section the term international organization, states:

The term "international organization" as used in the bill and generally in this report is specifically limited to public international organizations, i.e., those which are composed of governments as members--and of these, to those of which the United States is a member and which shall have been designated by the President by Executive order as being entitled to enjoy the benefits of the bill. Thus there are excluded from these benefits organizations of a private nature or public international organizations to which the United States does not belong.

Since the United States is not a member of X, X does not qualify as an international organization for the purposes of section 892.

Under Rev. Rul. 68-309, whether an international body representing more than one country constitutes a foreign government for purposes of section 892 of the Code depends upon whether that body is empowered to exercise independently substantial governmental powers that will be binding on its member countries. X does not qualify as a foreign government within the meaning of section 892 because it is not empowered to exercise independently substantial governmental powers binding upon its member countries.

Accordingly, in the instant case X does not qualify for the exemption provided by section 892 of the Code.

The same tests will be applied for determining whether such organization will be considered a foreign government or an international organization within the meaning of sections 893 and 4372 of the Code.

Rev. Rul. 75-298 is clarified as applying solely to organizations wholly owned and controlled by a single foreign government.