Rev. Rul. 72-220

Advice has been requested whether a foreign corporation, under the circumstances described below, was engaged in the active conduct of a trade or business during the entire calendar year of 1968 for purposes of determining whether the corporation is a "less developed country corporation" within the meaning of section 4916 of the Internal Revenue Code of 1954.

A foreign corporation was organized in a foreign country in 1956 and from that time until 1968 only held title to certain land in that country which was designated as a less developed country pursuant to the provisions of section 4916(b) of the Code and Executive Order No. 11285, C.B. 1966-2, 408. The corporation uses the calendar year for its annual accounting period. In 1967, the corporation decided to construct a resort hotel upon its land. During 1968, it solicited cost estimates and entered into negotiations for the financing of the project, had the necessary legal documents prepared, and readied the property for construction. The construction proceeded in due course during 1969 and 1970 and was completed in 1970. The circumstances clearly establish that the corporation in 1969 and 1970 was actively engaged in the business of operating certain income producing activities of the resort hotel and leasing certain facilities of the hotel to other persons.

Section 4916(a)(2) of the Code provides that the interest equalization taxes imposed by section 4911 of the Code shall not apply to the acquisition by a United States person of stock or a debt obligation of a less developed country corporation.

Section 4916(c)(1)(A) of the Code provides that the term "less developed country corporation" means a foreign corporation which for the applicable periods set forth in section 4916(c)(3) of the Code meets the requirements of section 955(c)(1) of the Code.

Section 955(c)(1) of the Code, among other requirements, provides that the term "less developed country corporation" includes a foreign corporation which during the taxable year is engaged in the active conduct of one or more trades or businesses.

Section 1.955-5(a)(3) of the Income Tax Regulations provides an example of a calendar year foreign corporation which was formed late in 1963 to engage in a manufacturing and selling business in a less developed country. Shortly after it was formed, it acquired a plant site and began construction of a plant which was completed on August 1, 1964. As soon as practicable thereafter, business commenced and continued throughout 1964 and thereafter. The example states that the taxpayer will be considered to be engaged in the active conduct of a trade or business for its entire taxable year 1963.

Accordingly, in the instant case, for purposes of determining whether the corporation is a less developed country corporation within the meaning of section 4916(c)(1)(A) of the Code, the activities engaged in by it in 1968, such as the developmental planning of the total resort complex, negotiating for financing, and readying of the property for construction, constitute being engaged in the active conduct of a trade or busines within the meaning of section 955(c)(1) of the Code, and the corporation will be considered as being so engaged for its entire taxable year of 1968.