Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 76-41

1976-1 C.B. 52

Section 165
Section 172
Section 1231

IRS Headnote

Foreign expropriation of U.S. subsidiary's stock. Under the guidelines prescribed in Rev. Ruls. 75-121 and 75-501, a foreign country's expropriation of the stock of a U.S. subsidiary of a U.S. corporation will qualify as a stock seizure loss for purposes of sections 165, 172, and 1231 of the Code only if legal ownership of the stock cannot be regained through a U.S. court proceeding; Rev. Ruls. 75-121 and 75-501 clarified.

Full Text

Rev. Rul. 76-41

The Internal Revenue Service has been asked to clarify the guidelines prescribed in Rev. Rul. 75-121, 1975-1 C.B. 70, and Rev. Rul. 75-501, 1975-2 C.B. 69, relating to the seizure by a foreign government of a domestic corporation's stock in its domestic or foreign subsidiary for purposes of sections 165, 172, and 1231 of the Internal Revenue Code of 1954.

Rev. Rul. 75-121 provides, in part, that a domestic corporation that pledged the stock of its domestic subsidiary to a foreign government as a guarantee for certain assurances and subsequently forfeited such stock for failure to keep those assurances, sustained a loss under section 165(a) of the Code to which sections 1231 and 172 are applicable, since the subsidiary's stock rather than the subsidiary's assets were confiscated.

Situation (2) of Rev. Rul. 72-1, 1972-1 C.B. 52, holds that a domestic corporation experienced an involuntary conversion, by seizure, of its subsidiary's stock when the subsidiary, which was incorporated in and whose assets were located in a foreign country, was nationalized by and continued to operate under the control of that country.

Rev. Rul. 75-501, clarifies Rev. Rul. 72-1 by providing the rationale for its holding that the subsidiary's stock was seized, namely that the subsidiary was incorporated in the foreign country and the expropriation decree was directed at the subsidiary rather than at the subsidiary's assets. In addition, since the subsidiary's assets were in fact in the foreign country and that country continued to conduct the subsidiary's operations through the subsidiary after the nationalization, both the form and substance of the transaction support the view that there was a seizure of stock.

Rev. Rul. 75-501 also provides, in part, that the stock of a domestic subsidiary, engaged in business in a foreign country is not subject to seizure by that country where it is neither the place of the subsidiary's legal existence nor the place where the stock certificates were located.

Implicit in the above Revenue Rulings is the requirement that a seizure of stock in a domestic corporation results in a loss for purposes of sections 165, 172, and 1231 of the Code, only if the United States shareholder cannot expect to regain legal ownership of the stock through a United States court proceeding.

Accordingly, Rev. Rul. 75-121 and Rev. Rul. 75-501 are clarified with respect to the requirements for a stock seizure under sections 165, 172, and 1231 of the Code. For purposes of such sections, a seizure of stock in a domestic corporation otherwise meeting the requirements of Rev. Rul. 75-121 or  Rev. Rul. 75-501 will not qualify as a stock seizure loss if the shareholder can expect to regain legal ownership of such stock through a United States court proceeding.

Rev. Rul. 75-121 and Rev. Rul. 75-501 are clarified.