Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 63-49

1963-1 C.B. 124

Caution: Obsoleted by Rev. Rul. 78-346

IRS Headnote

Optional investments in governmental securities made in lieu of payment of additional tax under article 12 of Colombian Decree No. 0285 of February 1955, are considered capital expenditures and are not allowable as a credit against United States income tax under section 901 of the Internal Revenue Code of 1954.

I.T. 4023, C.B. 1950-2, 49, distinguished.

Full Text

Rev. Rul. 63-49

Advice has been requested whether certain optional investments made in lieu of payment of the four-percent tax imposed under article 12 of Colombian Decree No. 0285 of February 1955, issued by the President of the Republic of Colombia, are allowable as a credit against United States income tax under section 901 of the Internal Revenue Code of 1954.

The Republic of Colombia, by Colombian Law No. 85 of 1946, imposed as an additional obligation on income taxes a charge of five percent for the construction and improvement of low-cost housing. The additional obligation could be discharged, in part, by undertaking construction for a taxpayer's own account or by undertaking reconstruction or repairs for houses owned by his workers. If he chose, a taxpayer could discharge the entire obligation by the purchase of bonds issued by certain government corporations engaged in providing public housing. By law the bonds were negotiable, but they had only nominal market value. Under article 2 of Colombian Decree No. 4051 of 1949, the additional obligation was continued as a national tax at a five-percent rate and became directly payable with the income tax. By article 4 of that Decree, taxpayers were given the option to become exempt from payment of one-half the tax by investing in securities of a government corporation engaged in the development and encouragement of the iron and steel industry. The stock of the corporation was to be negotiable after the corporation began production, and the stock had only a nominal market value. Colombian Decree No. 270 of 1953 reduced the tax rate from five percent to two and one-half percent.

By article 12 of Colombian Decree No. 0285 of February 1955, the tax rate was increased to four percent, but taxpayers were given the right to purchase stock in a government corporation in the amount of the tax, as specified in article 4 of Decree No. 4051, in lieu of paying the additional tax.

M, a United States corporation doing business in the Republic of Colombia, was subject to the additional tax of four percent imposed by Colombian Decree No. 0285 of February 1955, but elected to purchase stock in the Colombian governmental corporation in lieu of paying the tax. In filing its Federal income tax returns, M corporation claimed a credit against United States tax pursuant to section 901 of the Code for the amount of its investment in the Colombian securities.

The pertinent provisions of article 1 and article 2 of Colombian Decree No. 4051 of 1949 and of article 1 of Colombian Law 85 of 1946 are set out in I.T. 4023, C.B. 1950-2, 49.

Article 4 of Colombian Decree No. 4051, allowing the above- described option, provides as follows:

ART 4: Taxpayers presenting proof of having paid at the offices of the Empresa Siderurgica Nacional de Paz de Rio, or in a commercial bank to account and order of the said Company, an amount equal to that of this tax, for the purpose of purchasing for the taxpayer himself the number of shares of stock of the Empresa Siderurgica Nacional de Paz de Rio, equivalent to the said tax, calculated at their par value, shall be exempt from payment of the 2 1/2% enacted as tax for development and encouragement of the domestic iron and steel industry.

To be entitled to the exemption stated in this Article, it is an indispensable condition that the taxpayer waive the right to negotiate the stock until the Siderurgica begins production, and this fact must be recorded in the certificate and in the Company's books.

Taxpayers shall be entitled to subscribe the stock indicated in this Article, to avail themselves or the exemption granted, until the date when they pay the income and additional taxes. Taxpayers purchasing stock of the Empresa Siderurgica Nacional de Paz de Rio, S.A., in a greater amount than equivalent to the tax calculated for them in a given year, shall be entitled to have the excess computed for purposes of the respective exemption in subsequent fiscal years.

Section 901 of the Code provides, in part, as follows:

(a) Allowance of Credit.--If the taxpayer chooses to have the benefits of this subpart, the tax imposed by this chapter shall, subject to the applicable limitation of section 904, be credited with the amounts provided in the applicable paragraph of subsection (b) plus, in the case of a corporation, the taxes deemed to have been paid under section 902. * * *

(b) Amount Allowed.--Subject to the applicable limitation of section 904, the following amounts shall be allowed as the credit under subsection (a):

(1) Citizens and Domestic Corporations.--In the case of a citizen of the United States and of a domestic corporation, the amount of any income, war profits, and excess profits taxes paid or accrued during the taxable year to any foreign country or to any possession of the United States * * *

Section 903 of the Code provides that the term "income, war profits, and excess profits taxes" shall include a tax paid in lieu of a tax on income, war profits, or excess profits otherwise generally imposed by any foreign country or any possession of the United States.

I.T. 4023 provides that the five-percent tax imposed under article 2 of Decree No. 4051 of 1949, issued by the President of the Republic of Colombia, is an income tax which may be claimed as a credit against United States income tax under section 131(a) of the Internal Revenue Code of 1939, which corresponds to section 901 of the 1954 Code, subject to the limitations contained in section 131(b) of the 1939 Code, which corresponds to section 904 of the 1954 Code.

Although such fact was not brought out in I.T. 4023, the taxpayer corporation there involved had an option under article 4 to pay the additional tax imposed by article 1 or to purchase governmental securities. In that case the taxpayer elected to pay the Colombian tax rather than make the investment.

M corporation elected to purchase securities in lieu of paying the additional tax imposed by Colombian Decree No. 0285 on its income.

Although the optional investment was provided for under Colombian Decree No. 0285 of February 1955, as part of the income tax law, the purchase of securities under such option is, by United States concepts, in the nature of an investment to acquire a capital asset instead of the payment of a tax. The purchase of securities by M corporation under the option relieved M corporation of the liability for the additional tax but was not payment of a tax.

In view of the foregoing, it is held that a taxpayer who has purchased securities pursuant to article 12 of Colombian Decree No. 0285 of February 1955, in lieu of paying the additional tax imposed under the article has made a capital expenditures. Therefore, credit for the tax in lieu of which it was made is not allowable against United States income tax under section 901 of the Code.

I.T. 4023, C.B. 1950-2, 49, is hereby distinguished.