Rev. Rul. 78-356

Advice has been requested concerning the application of section 1491 of the Internal Revenue Code of 1954 to a transfer of stock by a United States citizen to a foreign corporation in exchange for a private annuity under the circumstances described below.

Individual A, a United States citizen, owns 5 percent of the outstanding stock of T, a domestic corporation. In 1974, as a result of arm's-length bargaining, A transferred A's 5 percent stock interest in T, to X, a foreign corporation, in exchange for a legally enforceable promise of X to pay A a life annuity in annual installments based upon the fair market value of the T stock at the time of the transfer. The annuity is not equity of X. The present value of the private annuity to be received by A, was equal to the fair market value of the T stock on the date of the transfer. Each share of T stock had a fair market value in excess of its adjusted basis in A's hands. A owns no stock of X.

With respect to transactions consummated before October 3, 1975, section 1491 of the Code, in part, imposes, on the transfer of stock or securities by a United States citizen to a foreign corporation as paid-in surplus or as a contribution to capital, an excise tax equal to twenty-seven and a half percent of the excess of the value of the stock or securities so transferred over its adjusted basis (for determining gain) in the hands of the transferor.

The exchange of appreciated stock for a bona fide, legally enforceable and valid annuity as the result of arm's-length bargaining between unrelated parties is not a transfer as paid-in surplus or as a contribution to capital within the meaning of section 1491 of the Code.

Accordingly, section 1491 of the Code does not apply to the transfer.

Compare Rev. Rul. 78-357, page 227, this Bulletin, which holds that section 1491 of the Code applies to a transfer of appreciated stock by a United States citizen to a foreign partnership in a part-sale and part-contribution transaction.

No opinion is expressed on the extent to which other provisions of the Code may apply to the transfer, or the annuity payments made under A's agreement with X.