PLR 200932007: RICs may count wholly owned CFCs' subpart F income as qualifying income

Plain-English summary

The IRS ruled that income attributable to regulated investment companies' wholly owned controlled foreign corporation subsidiaries would constitute qualifying income under the RIC gross-income test. The subsidiaries were expected to invest in commodities, commodity futures, notional principal contracts, securities, debt, or cash, and the RICs would include the subsidiaries' subpart F income in their own income. Because each RIC would own all of the voting power of its subsidiary, the subsidiaries would qualify as CFCs, and the attributable subpart F income would be treated as income derived from the RICs' business of investing in the subsidiaries' stock. The ruling was based on the taxpayers' representations and limited to the stated facts.

Ruling snapshot

• Question: Does subpart F income from each RIC's wholly owned CFC subsidiary constitute qualifying income under IRC § 851(b)(2)?
• Outcome: Approved, the attributable subpart F income constituted qualifying income.
• Key authorities: IRC §§ 851, 951, 952, 954, and 957; Investment Company Act of 1940 § 2(a)(36)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200932007
Release Date: 8/7/2009
Index Number: 851.02-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:FIP:B02
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PLR-103982-09
Date:

April 29, 2009

Legend:

Fund A = ------------------------------------------------------
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Fund B = ----------------------------------------------------
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Fund C = ---------------------------------------------------
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Fund D = -------------------------------------------------------
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Series 1 = ---------------------------------------------------

Series 2 = ---------------------------------------

Company = -----------------------------------

State A = ------------

State B = ------------

Country = ---------------------

Dear --------------:
PLR-103982-09
2

This is in response to a letter dated January 22, 2009, requesting a ruling that income earned by each Fund from an investment in its respective wholly-owned subsidiary that qualifies as a controlled foreign corporation (“CFC”), constitutes qualifying income under section 851(b)(2) of the Internal Revenue Code.

FACTS

Fund A is a corporation incorporated under the laws of State A. Fund B is a series of Series 1, a corporation that is also incorporated under the laws of State A. Fund C is a series of Series 2, another corporation that is incorporated under the laws of State A. Fund D is a statutory trust organized under the laws of State B.

Funds A and D are registered with the Securities and Exchange Commission as open-end management investment companies under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq. as amended (“the 1940 Act”). Funds B and C are series of open-end management investment companies under the 1940 Act.

Funds A, B, C and D (the “Funds”) have each filed an election to be treated as a regulated investment company (“RIC”) under section 851 of the Code.

Each Fund intends to form a wholly-owned subsidiary under the laws of Country, a non-United States jurisdiction. Under Country’s laws, each subsidiary will be formed as a Company. A Company provides limited liability for its shareholders.

Each Company will file an election (on Form 8832) to be taxed as a corporation pursuant to §301.7701-3 of the Procedure and Administration Regulations.

The Funds represent that although each Company will not be registered as an investment company under the 1940 Act, each Company will comply with the requirements of section 18(f) of the 1940 Act, Investment Company Act Release No. 10666, and related SEC guidance pertaining to asset coverage with respect to transactions in commodity futures and other transactions in derivatives.

Each Fund will invest a portion of its assets in its respective subsidiary Company, subject to the asset diversification limitations set forth in section 851(b)(3) of the Code. Each Company is expected to invest in commodities, commodity futures and notional principal contracts, but may also invest in securities or debt or hold cash.

Each Company will be wholly-owned by its respective Fund. The Funds represent that each Company will qualify as a controlled foreign corporation (“CFC”). Each Fund will include its respective Company’s “Subpart F” income for the taxable year in accordance with section 951 of the Code.
PLR-103982-09
3

LAW

Section 851(b)(2) of the Code provides that a corporation is not considered a RIC for any taxable year unless it meets an income test. Under this test, at least 90 percent of its gross income must be derived from certain sources. Under section 851(b)(2), qualifying income includes

. . .dividends, interest, payments with respect to securities loans (as defined in section 512(a)(5)), and gains from the sale or other disposition of stock or securities (as defined in section 2(a)(36) of the 1940 Act) or foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies . . . .

Section 2(a)(36) of the 1940 Act defines the term “security” as
any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit) or on any group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a “security”, or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing.

Section 851(b) of the Code provides that, for purposes of section 851(b)(2), the term “dividends” includes amounts included in gross income under sections 951(a)(1)(A)(i) or 1293(a) for the taxable year to the extent that, under sections 959(a)(1) or 1293(c), there is a distribution out of the earnings and profits of the taxable year which are attributable to the amounts so included.

Section 957 of the Code defines a CFC as any foreign corporation in which more than 50 percent of (1) the total combined voting power of all classes of stock entitled to vote, or (2) the total value of the stock, is owned by United States shareholders on any day during the corporation’s taxable year. A United States shareholder is defined in section 951(b) as a United States person who owns 10 percent or more of the total voting power of a foreign corporation.
PLR-103982-09
4

Section 951(a)(1) of the Code provides that if a foreign corporation is a CFC for an uninterrupted period of 30 days or more during any taxable year, every person who is a United States shareholder of the corporation and who owns stock in it on the last day of the taxable year in which the corporation is a CFC shall include in gross income the sum of the shareholder’s pro rata share of the CFC’s subpart F income for the taxable year.

Section 952(a)(2) defines subpart F income to include foreign base company income determined under section 954. Under section 954(a)(1), foreign base company income includes foreign personal holding company income determined under section 954(c). Section 954(c)(1)(A) defines foreign personal holding company income to include dividends, interest, royalties, rents, and annuities.

Companies’ investments may generate foreign personal holding company income under section 954(c), which is subpart F income. Funds would therefore include in income their respective Company’s subpart F income for the taxable year in accordance with section 951.

ANALYSIS AND CONCLUSION

Each Fund has represented that it will own 100 percent of the voting power of the stock of its respective subsidiary Company. The Funds are United States persons. Based upon the Funds’ representations, each of the respective Companies will qualify as CFCs under these provisions.

Based on the facts as represented, we rule that subpart F income of the Companies that is attributable to the Funds is income derived with respect to the Funds’ business of investing in the stock of Companies, and thus constitutes qualifying income under section 851(b)(2).

This ruling is directed only to the taxpayers who requested it, and is limited to the facts as represented by the taxpayers. Section 6110(k)(3) provides that this letter may not be used or cited as precedent.

In accordance with the power of attorney on file with this office, a copy of this letter is being sent to your authorized representative.

Sincerely,

David B. Silber______
David B. Silber
Chief, Branch 2
Office of Associate Chief Counsel
(Financial Institutions and Products)