PLR 201050011: IRS classified a foreign pension organization as a trust for federal tax purposes

Plain-English summary

The IRS considered the federal tax classification of a foreign organization created to provide disability, old age, and death benefits to covered employees and their beneficiaries. The organization was funded by employee and employer contributions and investment income, and its funds were held and managed for pension benefits. The IRS ruled that it was classified as a trust under Treas. Reg. § 301.7701-4(a) because its purpose was to protect and conserve property for beneficiaries who could not participate in managing that responsibility. The ruling did not address other federal tax or treaty consequences.

Ruling snapshot

• Question: Was the foreign pension organization treated as a trust for federal income tax purposes?
• Outcome: approved
• Key authorities: Treas. Reg. §§ 301.7701-1(b) and 301.7701-4(a); IRC § 6110(k)(3)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201050011
Third Party Communication: None
Release Date: 12/17/2010
Date of Communication: Not Applicable
Index Number: 7701.00-00, 7701.03-00
Person To Contact:
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Refer Reply To:
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PLR-112846-10
Date:
August 27, 2010

X = ----------------------------------------------------------------------------------------
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Entity = --------------------------------------

Country A = ----------------------
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Covered = ----------------------------------------------------------------------
Employees
Act B = -------------------------------------------

Act C = ----------------------

Body D = ------------------------------------------------------------------

Body E = -----------------------------------------------------------------------------

Dear -----------------

This responds to your letter dated March 18, 2010, submitted on behalf of X, in which you requested a ruling that X is treated as a trust for federal income tax purposes under
§ 301.7701-4 of the Procedure and Administration Regulations.

The information submitted states that X was organized as an Entity under the laws of County A. X was created to provide disability, old age and/or death benefits to Covered Employees and their beneficiaries. X is exempt from tax under the laws of Country A.

X is governed by Act B and Act C and regulated by Body D and Body E. X’s organizing documents provides the X’s purpose is to protect Covered Employees from the financial consequences of old age and death. X has all the powers necessary to satisfy the

PLR-112846-10
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requirements of Act B and Act C, and is permitted to take any actions necessary to satisfy such laws and to refrain from any action that would cause a breach of or non- compliance with such laws.

X derives its funds from a combination of employee contributions, employer contributions, and income from investments. The available funds of X are required to be invested responsibly, based on an investment plan adopted annually, to protect and grow the funds available for the payment of pension benefits. Act B requires that X publish annual financial reports and audits that demonstrate X’s compliance with Act B and Act C. The members of X cannot unilaterally assign or transfer their pension benefits to another person.

Section 301.7701-1(b) of the Administration and Procedure Regulations provides that the classification of organizations that are recognized as separate entities is determined under § 301.7701-2, § 301.7701-3, and § 301.7701-4 unless a provision of the Internal Revenue Code provides for special treatment of that organization.

Section 301.7701-4(a) provides that, in general, an arrangement will be treated as a trust if it can be shown that the purpose of the arrangement is to vest in trustees responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and, therefore, are not associates in a joint enterprise for the conduct of business for profit. If an entity has both associates and a business purpose, it cannot be classified as a trust for federal income tax purposes.

Based solely on the facts submitted and the representations made, we conclude that X is classified as a trust for federal income tax purposes under § 301.7701-4(a).

Except as specifically set forth above, no opinion is expressed or implied as to the federal tax consequences of the transaction described above under any other provision of the Code. Specifically, no opinion is expressed with respect to whether X or its beneficiaries are entitled to any benefits under the Code or the income tax treaty entered into by Country A and the United States concerning income derived from the United States.
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This ruling is directed only to the taxpayer on whose behalf it was requested. Section 6110(k)(3) provides that it 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 X’s authorized representative.

Sincerely,

Bradford R. Poston
Senior Counsel, Branch 2
(Passthroughs & Special Industries)

Enclosures (2)
Copy of this letter
Copy for § 6110 purposes

cc: