Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 73-77

1973-1 C.B. 34

Sec. 48

IRS Headnote

Transoceanic communication cable systems placed in service during 1968 from terminal facilities within the United States to terminal facilities outside the United States through international waters qualify for the investment credit.

Full Text

Rev. Rul. 73-77

Advice has been requested concerning the qualification for investment credit purposes of transoceanic cable systems extending from terminal facilities within the United States to terminal facilities outside the United States.

The taxpayer, a domestic corporation operating as an international communications common carrier, acquired and placed in service during the taxable year 1968 submarine cable systems originating in the United States and extending from terminal facilities within the United States to terminal facilities located in foreign countries. The entire facility qualifies as "section 38 property" within the meaning of section 48(a)(1) of the Internal Revenue Code of 1954. The cables were used for the transmission of messages between the terminals in the United States and the terminals in the foreign countries.

Section 48(a)(2)(A) of the Code provides to the effect that property which is used predominantly outside the United States is not "section 38 property" unless it falls within one of the exceptions of section 48(a)(2)(B) of the Code. For taxable year 1968 none of the exceptions of section 48(a)(2)(B) apply to the facts in the instant case. Section 1.48-1(g)(1) of the Income Tax Regulations generally provide that the determination of whether property is used predominantly outside the United States during the taxable year is made by comparing the period of time in such year during which the property is physically located outside the United States with the period of time in such year during which the property is physically located within the United States. If the property is physically located outside the United States during more than 50 percent of the taxable year, such property is considered used predominantly outside the United States during that year.

The specific issue in the instant case is whether the taxpayer's cable lying in international waters is property which is used predominantly outside the United States.

Revenue Ruling 69-2, 1969-1 C.B. 25, states that submarine cables are functionally used at the terminals of the system even though such cables lie on the ocean floor in international waters. Since the terminals involved therein are located in California and Hawaii, Revenue Ruling 69-2 holds that the submarine cables are used solely within the United States. In the instant case, the terminals of the system are located in the United States and foreign countries. However, since 50 percent of the terminal facilities used in 1968 was in the United States, then at least 50 percent of the functional use of the submarine cables was in the United States. Thus, the cables are not used predominantly outside the United States for purposes of section 48(a)(2)(A) of the Code. Section 1.48-1(g)(1) of the regulations does not apply because the physical location test provided therein is not germane to the use of the cables on the ocean floor.

Accordingly, in the instant case, the transoceanic cable systems extending from terminal facilities within the United States to terminal facilities outside the United States qualify for the investment credit allowed under section 38 of the Code.

For rules relating to a submarine cable system of a domestic corporation engaged in furnishing telephone service which system constitutes part of a communication link between the States and foreign countries. the construction, reconstruction or erection of which is completed by the taxpayer after August 15, 1971, or is begun by the taxpayer after March 31, 1971, or which is acquired by the taxpayer after August 15, 1971, or after March 31, 1971, and before August 15, 1971, if ordered after March 31, 1971, see section 48(a)(2)(B)(ix) of the Code as added by Section 104(c)(3) of the Revenue Act of 1971, Public Law 92-178, 85 Stat. 502, 1972-1 C.B. 443.