Rev. Rul. 74-620

As a result of the publication of Rev. Rul. 74-464, page 46, advice has been requested concerning the continuing validity of Rev. Rul. 72-337, 1972-2 C.B. 589, and Rev. Rul. 72-416, 1972-2 C.B. 591.

Rev. Rul. 72-337 concerns certain interest equalization tax (IET) and Federal income tax consequences of the issuance and sale to foreign persons of preferred stock by a wholly-owned domestic finance subsidiary of a domestic corporation. The preferred stock in question was convertible into the common stock of its parent corporation and dividend payments on the stock were guaranteed by the parent corporation.

Rev. Rul. 72-416 amplified Rev. Rul. 69-377, 1969-2 C.B. 231, and provided that the holdings in the latter Revenue Ruling are equally applicable to a situation where a domestic parent corporation contributes freely tradeable securities instead of cash to its wholly-owned domestic finance subsidiary. In other words, Rev. Rul. 72-416 holds that the "one" component of the 5 to 1 debt to equity ratio may be composed of freely tradeable securities as well as cash.

Rev. Rul. 74-464 revoked Rev. Rul. 69-377, Rev. Rul. 69-501, 1969-2 C.B. 233, Rev. Rul. 70-645, 1970-2 C.B. 273, and Rev. Rul. 73-110, 1973-1 C.B. 454, all of which concerned certain IET and Federal income tax consequences arising from the issuance of debt obligations by wholly-owned finance subsidiaries of domestic corporations. Rev. Rul. 74-464 holds that in light of the inseparability of the IET and the 5 to 1 debt to equity ratio and resultant Federal income tax consequences, the expiration of the IET on June 30, 1974, eliminated any rationale for treating finance subsidiaries any differently than other corporations with respect to their corporate validity or the validity of their corporate indebtedness. In revoking the four finance subsidiary Revenue Rulings, Rev. Rul. 74-464 holds, further, that the mere existence of a 5 to 1 debt to equity ratio as a basis for concluding that debt obligations of a finance subsidiary constitute its own bona fide indebtedness should no longer be relied upon.

Since Rev. Rul. 72-416 relates directly to the composition of the 5 to 1 debt to equity ratio, the revocation of Rev. Rul. 69-377 and the other three revenue rulings revoked by Rev. Rul. 74-464 eliminates the reason for and basis of the position expressed in Rev. Rul. 72-416. Moreover, although the fact situation of Rev. Rul. 72-337 does not involve a 5 to 1 debt to equity ratio, the favorable Federal income tax treatment that such Revenue Ruling accords to the finance subsidiary's dividends under sections 861(a)(2)(A), 1441, and 1442 of the Internal Revenue Code of 1954 is conditioned upon treating the convertible preferred stock as stock of the finance subsidiary and not its parent corporation.

As in the case of debt obligations issued by finance subsidiaries, the recognition of the finance subsidiary's preferred stock as stock of the finance subsidiary is conditioned upon the imposition of the IET on the acquisition of such stock by United States persons. The expiration of the IET on June 30, 1974, ended this condition.

Accordingly, Rev. Rul. 72-337 and Rev. Rul. 72-416 are revoked. Rev. Rul. 74-464 is amplified as provided herein.

Pursuant to the authority contained in section 7805(b) of the Code, the revocation will not affect debt obligations or preferred stock issued prior to the expiration of the IET on June 30, 1974, under financing arrangements that met the requirements set forth in the revenue rulings revoked by Rev. Rul. 74-464 and the revenue rulings revoked by this revenue ruling.