Rev. Rul. 79-116

Advice has been requested whether the taxpayer is a foreign personal holding company within the meaning of section 552 of the Internal Revenue Code of 1954 for purposes of determining whether the taxpayer is engaged in a trade or business in the United States within the meaning of section 864(b).

S, a foreign corporation, is engaged in the business of buying, holding, and selling for its own account common stock of United States corporations. All of S's income meets the definitional requirements of foreign personal holding company income under section 553 of the Code. All of the stock of S is owned by P, an "anstalt" (business trust) created under the laws of foreign country Y. P is classified as a "grantor trust" within the meaning of Subpart E of Part I, Subchapter J, Chapter 1 of the Code. A, a nonresident alien, is the owner of P and is married to B, a United States citizen. A has the power to revoke P and take over all its assets including the stock of S. S maintains its principal office and business activities in the United States and carries on all its activities in the United States.

Section 864(b)(2)(A)(ii) of the Code provides, in part, that the term "trade or business within the United States" does not include trading in stocks or securities for the taxpayer's own account. It further provides that this clause shall not apply in the case of a corporation (other than a corporation which is, or but for section 542(c)(7) or 543(b)(1)(C) would be, a personal holding company) the principal business of which is trading in stock or securities for its own account, if its principal office is in the United States.

Section 676(a) of the Code provides that the grantor of a trust shall be treated as the owner of any portion of the trust where at any time the power to revest in the grantor title to such portion is exercisable by the grantor.

Section 552(a) of the Code provides, in part, that the term "foreign personal holding company" means any foreign corporation if a specific percentage of its gross income for the taxable year is foreign personal holding company income as defined in section 553 and at any time during the taxable year more than 50 percent in value of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals who are citizens or residents of the United States (a United States group).

Section 542(c)(5) of the Code provides that the term "personal holding company" does not include a foreign personal holding company as defined in section 552.

Section 554(a) of the Code provides, in part, that for purposes of determining whether a corporation is a foreign personal holding company, an individual shall be considered as owning the stock owned directly or indirectly by or for the individual's family, which includes the spouse of the individual.

Trading in stocks or securities for a taxpayer's own account is included within the term "trade or business within the United States" when such activity is the principal business of a corporation whose principal office is in the United States. This rule does not apply, however, when such corporation is a personal holding company (or would be, but for section 542(c)(7) or 543(b)(1)(C) of the Code). If the requirements of section 552(a) are met, then S is not a personal holding company because S would be a foreign personal holding company and as such would be specifically excluded from the definition of a personal holding company by section 542(c)(5). Thus, section 864(b)(2)(A)(ii) would not operate to exclude S's trading in stocks or securities for its own account from the definition of a trade or business within the United States.

In the instant case S meets the gross income requirements for purposes of being classified as a foreign personal holding company under section 552 of the Code because all of its gross income meets the definition of foreign personal holding company income as defined in section 553. However, in order to be classified as a foreign personal holding company, S must also meet the stock ownership requirement of section 552.

Pursuant to section 676(a) of the Code, A as the owner of P is treated as owning the stock of S. A's spouse, B, is considered to constructively own the stock of S pursuant to section 554(a). Because B is a United States citizen, the stock ownership requirement in section 552 is met.

Accordingly, S is a foreign personal holding company within the meaning of section 552 of the Code and is not a corporation that is or would be, but for section 542(c)(7) or 543(b)(1)(C), a personal holding company. Thus, S is engaged in a trade or business in the United States within the meaning of section 864(b) and is taxable on its taxable income that is effectively connected with the conduct of the trade or business within the United States. Furthermore, because A, the actual owner of the stock of S, is not a citizen or resident of the United States, any undistributed foreign personal holding company income of S will not be included in A's gross income under section 551.