IRS Revenue Ruling
2001-39

Code Sec. 1504

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U.S. corporation; wholly-owned Mexican subsidiary treated as a domestic
corporation. This ruling obsoletes Rev. Rule 70-379 (1970-2 C.B. 179)
relating to U.S. corporations electing under section 1504(d) of the Code
to treat its wholly-owned Mexican subsidiary as a domestic corporation for
the purpose of filing consolidated returns.


REV. RUL. 2001-39

This revenue ruling obsoletes Rev. Rul. 70-379 (1970-2 C.B. 179).

Rev. Rul. 70-379 concluded that a U.S. corporation may elect under
section 1504(d) of the Internal Revenue Code (the "Code") to treat its
wholly-owned Mexican subsidiary as a domestic corporation for the purpose
of filing consolidated returns because the subsidiary was organized under
the laws of Mexico solely to comply with Mexican law as to title and
operation of property in Mexico. Because the U.S. parent corporation could
not directly own Mexican real estate under Mexican law, organization of
the Mexican subsidiary was necessary in order to comply with Mexican law
relating to the title of real estate.

The rationale underlying Rev. Rul. 70-379 was based, in part, upon
Mexican law and legal authorities that interpreted Article 27 of the
Mexican Constitution to prohibit direct ownership of Mexican real estate
by certain non-Mexican residents. In particular, it was based on Article
34 of the Mexican Nationality and Naturalization Law, and the Official
Declarations of the Secretariat of Foreign Relations, issued January 7,
1936, representing an official interpretation of Article 27 of the Mexican
Constitution.

Since the publication of Rev. Rul. 70-379, the Mexican legal
interpretations on which the ruling were based have been subject to
considerable revision. Most significantly for purposes of Rev. Rul.
70-379, Article 10A of the Mexican Foreign Investment Law of 1993, as
amended effective December 25, 1996 ("1996 Amendment"), now allows direct
foreign ownership of real estate in certain circumstances. As a result,
after the effective date of the 1996 Amendment, a U.S. corporation in
these circumstances does not meet the requirements for an election under
section 1504(d) to treat its wholly-owned Mexican subsidiary as a domestic
corporation for the purpose of filing consolidated returns because
organization of such subsidiary would not be necessary to comply with
Mexican law as to the title and operation of property in Mexico,
Accordingly, the IRS is obsoleting Rev. Rul. 70-379, and taxpayers may not
rely upon it on or after December 25, 1996 (the effective date of the 1996
Amendment). Application of section 1504(d) in circumstances other than
those addressed by the 1996 Amendment continues to require an assessment
of the status of the relevant Mexican law with respect to Mexican real
estate holdings.


EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 70-379, 1970-2 C.B. 179, is obsoleted effective December 25,
1996.


DRAFTING INFORMATION

The principal author of this revenue ruling is Kenneth Allison of the
Associate Chief Counsel (International) (CC:INTL:Br4). For further
information regarding this revenue ruling, contact Mr. Allison at (202)
622-3860 (not a toll-free call).

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