PLR 1020003: IRS treated a regulated investment company's Subpart F income as qualifying income

Plain-English summary

The IRS ruled that Subpart F income from a regulated investment company's wholly owned foreign subsidiary would be qualifying income under IRC § 851(b)(2). The fund intended to qualify each year as a regulated investment company and represented that the subsidiary would be a controlled foreign corporation and that its income would be Subpart F income. Because the fund's Subpart F income was attributable to its business of investing in the subsidiary's stock, the income satisfied the qualifying-income test. The ruling was limited to the facts and representations submitted.

Ruling snapshot

• Question: Does Subpart F income attributable to a regulated investment company's investment in its wholly owned controlled foreign corporation qualify under IRC § 851(b)(2)?
• Outcome: Approved
• Key authorities: IRC §§ 851(b)(2), 851(b)(3), 951, 952, 954, and 957

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201020003
Release Date: 5/21/2010 Person To Contact:
------------------ ID------------------
Index Number: 851.02-00 Telephone Number:
---------------------
Refer Reply To:

                                                            CC:FIP:B02

                                                            PLR-138880-09

------- Date:
----------------------- January 26, 2010

Legend:

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

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

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

Sub = -----------------------------------------------------

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

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

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

    This is in response to a letter dated August 25, 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

PLR-138880-09 2

   Fund will be a series of Trust and plans to be classified as a corporation for

federal income tax purposes. Trust is a business trust organized under the law of State.
Fund intends to be registered as an open-end management company under the
Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq. (“the 1940 Act”).

  Fund intends to qualify each year as a regulated investment company (“RIC”)

under section 851 of the Code.

  Fund intends to form a wholly-owned subsidiary (“Sub”) under the laws of

Offshore, a non-United States jurisdiction. Under Offshore’s laws, Sub will be formed
as a Company. A Company provides limited liability for its shareholders. It is
represented that Sub will be treated as a corporation for federal income tax purposes
under default entity classification rules.

   It is further represented that Sub 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 Sub will not be registered as an investment

company under the 1940 Act, it 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 investments that would apply if Sub were
registered under the 1940 Act.

   Fund will invest a portion of its assets in Sub, subject to the limitations set forth in

section 851(b)(3) of the Code.

   Fund expects that all of Sub’s income will be “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

PLR-138880-09 3

   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.

   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.

PLR-138880-09 4

  Sub’s investments may generate foreign personal holding company income

under section 954(c), which is subpart F income. Fund would therefore include in
income Sub’s subpart F income for the taxable year in accordance with section 951.

                         ANALYSIS AND CONCLUSION

   Fund has represented that Sub will be a wholly-owned subsidiary of Fund. Fund

is a United States person. Based upon Fund’s representations, Sub will qualify as a
CFC under these provisions.

    Based on the facts as represented, we rule that subpart F income of Sub that is

attributable to Fund is income derived with respect to Fund’s business of investing in the
stock of Sub, 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, copies of this

letter are being sent to your authorized representatives.

                                       Sincerely,


                                       Susan Thompson Baker
                                       Susan Thompson Baker
                                       Assistant to the Branch Chief, Branch 2
                                       Office of Associate Chief Counsel
                                       Financial Institutions and Products