Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 66-73

1966-1 C.B. 174

IRS Headnote

The Internal Revenue Service discussed the applicability of sections 892, 893, and 4382 of the Internal Revenue Code of 1954 to an organization separate in form but wholly owned by a foreign government. I.T. 3789, C.B. 1946-1, 100, modified.

Full Text

Rev. Rul. 66-73

Advice has been requested concerning the applicability of sections 892, 893, and 4382 of the Internal Revenue Code of 1954 to an organization separate in form but wholly owned by a foreign government.

In 1946 the Internal Revenue Service in I.T. 3789, C.B. 1946-1, 100, announced its position that the benefits of section 116(c) of the Internal Revenue Code of 1939 (predecessor of section 892 of the 1954 Code) which exempts foreign governments from income tax "cannot be extended to a corporation which is wholly owned by a foreign government inasmuch as a corporation is an entity separate and distinct from its sole stockholder." This is simply an application of a basic legal principle. However, the Tax Court of the United States in Louis Vial, 15 T.C. 403 (1950), acquiescence, C.B. 1952-1, 4, tempered this principle by limiting its application to a "corporation as that term is understood in the United States."

As a result of the Vial decision and extended reconsideration, it is now the position of the Service that an organization separate in form and wholly owned by a foreign government, and no part of the net earnings of which inures to the benefit of any private shareholder or individual, regardless of where organized and whether with stock outstanding, is exempt under section 892 of the Code, provided it does not constitute a corporation as that term is generally understood in the United States and as explained in the following paragraph.

Whether an organization constitutes a corporation as contemplated by this rule will depend directly upon its purposes, functions, and activities. Where its purposes, functions, and activities, taken as a whole, customarily are attributable to and carried on by private enterprise for profit in this country, it will be deemed to constitute a corporation separate from its owner even though in some instances governments also are engaged in the same or a similar activity in the United States. On the other hand, where the organization does not have purposes, functions, and activities of the type which are customarily attributable to and carried on by private enterprise for profit in this country, or, to the extent it has such purposes, functions, and activities, taken as a whole they are so circumscribed and limited that the organization does not in fact substantially resemble such a private enterprise, it will not be deemed to constitute a corporation separate from its owner, and hence will be entitled to the benefits granted by section 892 of the Code.

The same test will be applied for purposes of determining what organizations will be considered to be part of a "foreign government" within the meaning of sections 893 and 4382 of the Code.

I.T. 3789, C.B. 1946-1, 100 is hereby modified.