PLR 201007044: IRS treated a controlled foreign corporation's Subpart F income as qualifying RIC income

Plain-English summary

The IRS ruled that Subpart F income from a regulated investment company's wholly owned controlled foreign corporation would count as qualifying income for the investment company's 90-percent gross-income test. The investment company planned to form the foreign subsidiary, elect to have it treated as a corporation, and invest part of its assets in it. The IRS concluded that the subsidiary would be a controlled foreign corporation and that the Subpart F income attributable to the fund would be income derived from the fund's business of investing in the subsidiary's stock. The ruling was based on the taxpayer's representations and did not address unrelated tax consequences.

Ruling snapshot

• Question: Would the fund's attributable Subpart F income from its controlled foreign corporation constitute qualifying income under IRC § 851(b)(2)?
• Outcome: Approved
• Key authorities: IRC §§ 851(b)(2), 951, 952, 954, and 957; Treas. Reg. § 301.7701-3

Full text (IRS public release)

Internal Revenue Service                                        Department of the Treasury
                                                                Washington, DC 20224

Number: 201007044
Release Date: 2/19/2010
Index Number: 851.02-00
                                                                Person To Contact:
---------------------------------------                         ------------------ ID------------------
---------------------------                                     Telephone Number:
-------------                                                   ---------------------
------------------------------------------                      Refer Reply To:
-------------------------------------------                     CC:FIP:B02
 -----------------------------------                            PLR-134254-09
                                                                Date:
                                                                November 4, 2009




Legend:

Fund                                =         ----------------------------------------
---------------------------------------------------------------------

Trust                               =         ---------------

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

State                               =         ------------

Offshore                            =         ---------------------


Dear -----------:

       This is in response to a letter dated July 21, 2009, requesting a ruling that income earned by Fund from an investment in its 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 is a separate series of Trust. Trust is a statutory trust organized under the law of State, and is an open-end management company under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq. (“the 1940 Act”).

      Fund represents that it qualifies as a regulated investment company (“RIC”) under section 851 of the Code.

PLR-134254-09                                  2

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

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

       Fund represents that although Subsidiary will not be registered as an investment company under the 1940 Act, Subsidiary 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.

       Fund will invest a portion of its assets in Subsidiary, subject to the asset diversification limitations set forth in section 851(b)(3) of the Code.

      Fund expects that all of Subsidiary’s income will be “Subpart F” income, but Fund may also receive income from Subsidiary that is not properly characterized as Subpart F income.

                                            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.

PLR-134254-09                                   3

       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.

       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.

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

                              ANALYSIS AND CONCLUSION

       Fund has represented that Subsidiary will be a wholly-owned subsidiary of Fund. Fund is a United States person. Based upon Fund’s representations, Subsidiary will qualify as a CFC under these provisions.

PLR-134254-09                                  4

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

       This ruling is directed only to the taxpayer who requested it, and is limited to the facts as represented by the taxpayer. 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)