Rev. Proc. 77-17

Section 1. Purpose and Background

Rev. Proc. 68-23, 1968-1 C.B. 821, sets forth guidelines used by the Internal Revenue Service in considering requests for rulings under section 367 of the Internal Revenue Code of 1954, prior to its amendment by section 1042 of the Tax Reform Act of 1976, Pub. L. No. 94-455, 94th Cong., 2nd Sess. (October 4, 1976) 1976-3 C.B. 110 (Vol. 1). Section 3.03 of Rev. Proc. 77-5, page , this Bulletin, states that these guidelines, until superseded, will continue to be followed in issuing rulings under section 367 of the Code, as amended.

Section 3 of Rev. Proc. 68-23 describes transactions which will ordinarily receive favorable consideration under section 367 of the Code. One such transaction is described in Section 3.02(1)(a)(iii)(A), as follows:

Stock or securities of less developed country corporations described in section 955(c)(1) of the Code to be transferred to a controlled foreign corporation (as defined in section 957(a) of the Code) which immediately after the exchange will be a less developed country corporation holding company described in section 902(d)(2) of the Code without regard to the holding period referred to in section 1.902-4(a)(2)(i) of the regulations. This exception shall apply only on the condition that these requirements which must be met immediately after the exchange will continue to be met in the reasonably foreseeable future.

The above-quoted transaction was included in Section 3 of Rev. Proc. 68-23 to permit United States shareholders to align their foreign corporations in such a manner as to allow the United States shareholders to take advantage of section 954(b)(1) of the Code without immediate Federal income tax consequences that would occur if this type of transaction did not receive favorable consideration under section 367.

Section 954(b)(1) of the Code provided an exclusion from foreign base company income of section 954(a) of certain dividends, interest, and gains from qualified investments in less developed countries as defined in section 955(b)(1) to the extent that such income was reinvested in any less developed country. Thus, section 954(b)(1) permitted the transfer, through a base company, of income from one less developed country corporation to another less developed country corporation within the same corporate family without the inclusion of such income in Subpart F income as defined in section 952.

The Tax Reduction Act of 1975, section 602(c)(1) 1975-1 C.B. 545, 564, repealed section 954(b)(1) of the Code effective for taxable years of foreign corporations beginning after December 31, 1975. As a result of this change, there is no further need to provide an exception to the transfer of stock under those circumstances.

Sec. 2. Effect on Other Documents

Section 3 of Rev. Proc. 68-23 is modified to delete the transaction described in Section 3.02(1)(a)(iii)(A).

Pursuant to section 2.02 of Rev. Proc. 68-23, a taxpayer is still free to establish that, based on all the facts and circumstances of the taxpayer's case, a favorable ruling under section 367 of the Code should be issued.

Rev. Proc. 68-23 is modified.