Rev. Rul. 89-12

1989-1 C.B. 319, 1989-4 I.R.B. 8.

                       Internal Revenue Service

                                 Revenue Ruling

       SHAREHOLDER'S PRO RATA SHARE OF A CONTROLLED FOREIGN CORPORATION'S

                 INCREASE IN EARNINGS INVESTED IN U.S. PROPERTY

                          Published: January 23, 1989

SECTION 7805. - RULES AND REGULATIONS, 26 CFR 301.7805-1: Rules and regulations

  Shareholder's pro rata share of a controlled foreign corporation's increase in earnings invested in U.S. property. Rev. Rul. 71-373 that provides that a debt incurred by a wholly owned foreign corporation to a foreign bank reduces the amount of investment in U.S. property where the domestic parent issues a promissory note to guarantee the debt, is obsolete for investments in U.S. property made on or after June 14, 1988.

  T.D. 8209, 1988-29 I.R.B. 5, published in the Federal Register on June 14, 1988, provides temporary and proposed regulations that amend the specific charge rule under section 1.956-1(e) of the Income Tax Regulations with respect to investments in U.S. property made on or after June 14, 1988. Section 1.956- 1T(e)(5) of the regulations, provides that, in the case of an investment in U.S. property that is an obligation of a related person, a liability will not be recognized as a specific charge reducing the investment in U.S. property if the liability representing the charge is with recourse with respect to the general credit or other assets of the investing controlled foreign corporation.

  In Rev. Rul. 71-373, 1971-2 C.B. 275, a domestic corporation desired to obtain funds from a bank in country W. Such funds were available to the domestic corporation's country W subsidiary at an interest rate below that prevailing in the United States, a rate not available to the domestic parent. Consequently, the parent delivered its own promissory note to its country W subsidiary in the desired amount. Under the banking practices in country W, the bank required parent's note as collateral for the loan to the subsidiary. Upon delivery of the parent's note to the country W bank, the funds were delivered to the subsidiary, which in turn forwarded them to its parent.

  The United States property involved in Rev. Rul. 71-373 is the promissory note given by the domestic parent to provide collateral for the subsidiary's loan from the country W.bank. The revenue ruling held that, because the subsidiary had a liability to the country W bank identical to its United States property (the parent's note) that was contemporaneously incurred with the acquisition of such property, and because the subsidiary was required to discharge the obligation to the bank at the same time as the parent paid its note to the subsidiary, there was a specific charge against the property that was a liability within the meaning of section 1.956-1(e) of the regulations. Therefore, in determining the amount of the subsidiary's investment in United States property for purposes of sections 951(a)(1)(B) and 956 of the Internal Revenue Code, the revenue ruling held that the debt incurred by the subsidiary to the country W bank reduced the amount of the subsidiary's investment in United States property in accordance with section 956-l(e)(l).

  Rev. Rul. 71-373 is silent about whether the subsidiary's debt to the country W bank was with or without recourse. Accordingly, pursuant to the authority contained in section 7805 of the Internal Revenue Code of 1986, Rev. Rul. 71-373 is declared obsolete for investments made on or after June 14, 1988.

EFFECT ON OTHER DOCUMENTS

  Rev. Rul. 71-373 is obsolete for investment in United States property made on or after June 14, 1988.

DRAFTING INFORMATION

  The principal author of this Revenue Ruling is Riea M. Lainoff of the Office of Chief Counsel (International) within the Office of Chief Counsel. For further information regarding this Revenue Ruling contact Ms. Lainoff on (202) 566-6645 (not a toll-free call).

Rev. Rul. 89-12, 1989-1 C.B. 319, 1989-4 I.R.B. 8.