Rev. Rul. 70-464, 1970-2 CB 152, IRC Sec(s). 901

Headnote:

Rev. Rul. 70-464, 1970-2 CB 152 -- IRC Sec. 901 (Also Section 164; 1.164-1.)

Reference(s): Code Sec. 901; Reg § 1.901-1

The personal fortune tax levied on a United States citizen residing in Zurich, Switzerland is not allowable as a foreign tax credit; however, the portion allocable to securities held for the production of income is deductible under section 164 of the Code.

Full Text:

Advice is requested whether the Zurich Vermoegenssteuer (personal fortune tax) is a creditable tax under section 901 of the Internal Revenue Code of 1954. Also, request is made whether such tax constitutes a deductible tax under section 164 of the Code.

The taxpayer, a United States citizen, is residing permanently in Zurich, Switzerland. His income consists primarily of dividends and interest from an investment portfolio of United States stocks and bonds. As a resident of Zurich, the taxpayer is required to pay the Zurich Vermoegenssteuer which is levied annually pursuant to the Zurich Cantonal Law of July 8, 1951. The Vermoegenssteuer is in addition to and solely supplementary to the tax levied on individual income by Zurich. It is collected on the net fortune of an individual valued at market value. The tax rate is determined annually by the commune in connection with the approval of the canton budget as a percentage of the basic rate of the state tax.

A tax on capital is not an income tax within the meaning of the Internal Revenue Code. Also, a tax on the unrealized increment in the value of capital is not a tax on income. Lynch v. Turrish, 247 U.S. 221 (1918).

Section 164(a) of the Code provides, in pertinent part, for the deduction for the taxable year within which paid or accrued of foreign real property taxes, foreign income, war profits, and excess profits taxes. In addition, such section provides for the deduction of foreign taxes which are paid or accrued within the taxable year in carrying on a trade or business or an activity described in section 212 of the Code (relating to expenses for production of income).

Accordingly, since the Zurich Vermoegenssteuer is a tax levied annually as a percentage of the market value of the fortune of the taxpayer, such tax is not an income tax and, hence, is not a creditable tax under section 901 of the Code. However, it is further held that the Zurich Vermoegenssteuer which is allocable to the stocks and bonds owned by the taxpayer (which are held for the production of income within the meaning of section 212 of the Code) is a deductible tax under section 164 of the Code.