Rev. Proc. 74-49

Section 1. Purpose.

The purpose of this Revenue Procedure is to state certain guidelines to be followed by broker-dealers, certain banks and trust companies, and certain other parties as a result of Executive Order 11766, 1974-1 C.B. 322, which reduced to zero the rate of the Interest Equalization Tax (IET) effective for acquisitions of foreign stock and debt obligations made after January 29, 1974. This reduction meant that no IET liability would be incurred by U.S. persons making acquisitions after January 29, 1974. For acquisitions made under the rules of a national securities exchange registered with the Securities and Exchange Commission, or over-the-counter through a member of the National Association of Securities Dealers, Inc., however, the zero rate applied only if the trade date was after January 29, 1974.

Sec. 2. Background.

.01 Section 4918 of the Internal Revenue Code of 1954 outlined procedures to be followed in order for a U.S. person who acquired foreign securities to avail himself of the IET exemption for prior American ownership and compliance. Since 1967 those procedures included the issuance by IET "participating firms" of IET clean confirmations and written comparisons and the issuance by "participating custodians" of transfer of custody certificates indicating that the section 4918 exemption applied. In addition, the exemption was made available to the acquiring U.S. person where the person disposing of the foreign securities obtained a "Validation Certificate of Prior American Ownership and Interest Equalization Tax Compliance" (Form 4322) from his Internal Revenue Service District Director indicating that he had satisfied his IET liability, if any, at the time he acquired his securities.

Sec. 3. Guidelines.

0.1 TIR-1280 described the recordkeeping and recording requirements that broker-dealers and certain bank and trust companies were required to observe while the IET rate remained at zero. In addition, the release also outlined certain contingency procedures to be followed if IET was reimposed at a positive rate.

.02 While the zero rate remained in effect it was not necessary for U.S. persons who acquired foreign securities to avail themselves of the exemption for prior American ownership and compliance under section 4918 of the Code. Further, no notations with respect to IET were required on comparisons, confirmations, delivery tickets, transfer of custody certificates, and orders.

.03 Persons disposing of foreign securities during the zero rate period were no longer required to obtain a validatios certificate from the District Director in order for a broker-dealer to effect the sale of the securities.

.04 A broker-dealer which was qualified on January 29, 1974, as a "participating firm" under section 4918(c) of the Code and under Technical Information Release 925 (issued August 12, 1967), was no longer required to maintain the separate books and records required by those rules on trades effected after January 29, 1974. Nor were banks and trust companies which qualified on January 29, 1974, as "participating custodians" under section 4918(f) and TIR-925 required to maintain separate books and records required by those rules on deliveries effected after January 29, 1974.

.05 No IET returns or reporting forms were required to be filed by broker-dealers with respect to trades effected after January 29, 1974, as long as the zero rate remained in effect. These returns and forms included:

Forms 3780 and 3780-A--Where a broker-dealer acquired foreign securities for its own account after January 29, 1974, on which the rate of IET was zero, it was not required to file Form 3780 (IET Quarterly Tax Return) or Form 3780-A (IET Transactional Tax Return) with respect to such acquisitions. However, Form 3780 was still required to be filed with respect to taxable acquisitions made on or before January 29, 1974. In addition, Form 3780-A was still required to be filed with respect to acquisitions of foreign securities on or before January 29, 1974, which were subject to IET and which were disposed of before the Form 3780 was filed for the calendar quarter in which the securities were acquired.

Form 4410--Since participating firms were no longer required to observe the procedures under section 4918 of the Code for sales and acquisitions of foreign securities effected after January 29, 1974, withholding of IET under section 4918(e)(7) was not required on any such sales. Thus, a Form 4410 (IET Quarterly Return of Tax Withheld by Participating Firm) was not required to be filed with the I.R.S. by any broker-dealer with respect to such trades, as long as the zero rate continued. However, Form 4410 had to be filed, if applicable, with respect to sales effected on or before January 29, 1974.

Form 3845--Every broker-dealer, whether or not it qualified as a participating firm, was required to file a quarterly information return with the I.R.S. on Form 3845 reporting all acquisitions of foreign securities made by it (whether for its own account or for the account of U.S. customers) which were from non-U.S. persons and which were subject to IET. Non-participating firms were subject to a $1,000 penalty for failing to file the form. Since no tax was imposed on foreign securities which were acquired after January 29, 1974, Form 3845 was not required to be filed with respect to such trades. Form 3845 was required to be filed, however, with respect to trades effected on or before January 29, 1974, if applicable. However, despite the reduction of the IET rate to zero, the requirement of section 147.9-4(b)(2)(ii) of the Temporary Regulations under the Interest Equalization Tax Act that commercial banks file a Federal Reserve Form 502 with the Commissioner of Internal Revenue continued in effect until the termination date in section 4911(d) of the Code. This requirement, however, did not apply to commercial banks which were members of the Federal Reserve System, or to commercial banks which were not members of the System provided such nonmember banks (a) notified the Commissioner of Internal Revenue that they intended to file Federal Reserve Form 502 or 503 with the Federal Reserve System, and (b) complied with the filing and information requirements imposed on member banks of the Federal Reserve System with respect thereto.

Sec. 4. Guidelines to Be Used if Positive IET Rate Reimposed Prior to Expiration Date.

.01. If a positive IET rate had been reimposed prior to the expiration date in section 4911(d) of the Code, all broker-dealers and banks or trust companies which were qualified respectively as participating firms or participating custodians on January 29, 1974, would have automatically been requalified as participating firms or participating custodians as of the effective date of the reimposition, provided they immediately resumed keeping separate books and records as of such date. Maintenance of separate books and records during the period the zero rate was in effect would not have been necessary for it would have served no useful purpose since no IET liability could be incurred with respect to trades during that period. If the IET had been reimposed, however, certain additional rules might have been adopted in order to ensure that such broker-dealers and banks or trust companies qualified under TIR-925 (or under such rules as might supersede or supplement those rules.) However, such rules would not have required that such broker-dealers maintain separate books and records during the period that the IET rate was zero.

.02 In those cases where broker-dealers and their customers wanted to prove for purposes of section 4918(a) of the Code that they had acquired particular foreign securities prior to the effective date of reimposition of a positive IET rate, they could have followed transitional rules which the Service would have established as of the effective date of the reimposition. Under these rules, which were to be similar to those contained in section 4918(g), all foreign securities held in the "transition inventory" of a participating firm could subsequently be resold free of IET without a validation certificate.

Sec. 5. Scope and Duration.

These guidelines were intended only to apply to the period while the IET rate was zero. Since IET has subsequently expired and does not apply to any acquisition made after June 30, 1974, the above guidelines apply only to the period after January 29, 1974, and before July 1, 1974.

¹ Also released as TIR-1280, dated April 3, 1974.