PLR 1132008: Subpart F income from a wholly owned CFC is qualifying RIC income

Plain-English summary

The IRS ruled that subpart F income attributed to a regulated investment company from its investment in a wholly owned controlled foreign corporation would constitute qualifying income under section 851(b)(2). The fund planned to obtain commodity-market exposure through the subsidiary's investments. Because the subsidiary was wholly owned by the fund, it would qualify as a controlled foreign corporation, and the fund would include the subsidiary's subpart F income in its own income. The ruling did not determine whether the fund otherwise qualified as a regulated investment company under Subchapter M.

Ruling snapshot

• Question: Is subpart F income from the fund's wholly owned foreign subsidiary qualifying income under section 851(b)(2)?
• Outcome: approved
• Key authorities: IRC §§ 851, 951, 952, 954, and 957; 15 U.S.C. § 80a-1 et seq.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201132008 Third Party Communication: None
Release Date: 8/12/2011 Date of Communication: Not Applicable
Person To Contact:
Index Number: 851.02-00 ----------------, ID No. ------------
Telephone Number:
--------------------
---------------------------------------------------- Refer Reply To:
------------------------------------------------------ CC:FIP:B02
------------------------------------------------ PLR-112863-11
--------------------------------------- Date:
---------------------------- May 04, 2011

Legend:

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

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

      Subsidiary                 =        -----------------------------

      Type A Company             =        ------------------------------------

      State                      =        ------

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

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

    This responds to your request dated March 16, 2011, submitted by your

authorized representative on behalf of Fund. Fund requests that the Internal Revenue
Service rule that income earned by Fund from its investment in its wholly-owned
subsidiary, a controlled foreign corporation, will constitute qualifying income to Fund
under section 851(b)(2) of the Code.

Facts:

    Fund is a separate series of beneficial interest of Trust. Trust is an open-end

management company organized under the laws of State and is registered as an
investment company under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et
seq., as amended (the “1940 Act”). Fund has elected or will elect to be taxed as a
PLR-112863-11 2

regulated investment company (“RIC”) under Subchapter M of the Code. Fund uses an
accrual method of accounting and a calendar year.

   Fund has formed Subsidiary, a wholly-owned subsidiary incorporated as a Type

A Company under the laws of Country. Under the laws of Country, a Type A Company
provides limited liability for all holders of shares. A shareholder’s liability is limited to the
amount, if any, unpaid with respect to the shares acquired by the shareholder.
Subsidiary will file an election on Form 8832, Entity Classification Election, to ensure
that Subsidiary will be treated as a corporation for federal income tax purposes.

   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 investments to which this
authority would apply if Subsidiary were registered under the 1940 Act.

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

forth in § 851(b)(3) of the Code. Fund is expected to obtain exposure to the commodity
markets through Subsidiary’s investments.

Law and Analysis:

   Section 851(b)(2) of the Code provides that a corporation shall not be 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 enumerated sources. Section
851(b)(2) defines qualifying income, in relevant part, as –

   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 [the RIC’s]
   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

PLR-112863-11 3

   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.

   In addition, § 851(b) of the Code provides that, for purposes of § 851(b)(2), there

shall be treated as dividends amounts included in gross income under §§ 951(a)(1)(A)(i)
or 1293(a) for the taxable year to the extent that, under §§ 959(a)(1) or 1293(c) (as the
case may be), there are distributions 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 controlled foreign corporation (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 § 951(b) as a United States person who owns
10 percent or more of the total voting power of a foreign corporation. Fund represents
that Subsidiary will be wholly owned by Fund, and that Subsidiary therefore will qualify
as a CFC under these provisions.

    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 this corporation and who owns stock in this
corporation on the last day of the taxable year in which the corporation is a CFC shall
include in gross income the shareholder’s pro rata share of the CFC’s subpart F income
for the taxable year.

   Section 952(a)(2) of the Code 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). Under section 954(c)(1), foreign personal holding company income
includes (among other things): dividends, interest, royalties, rents, and annuities; gains
in excess of losses from transactions in commodities (including futures, forward, and
similar transactions but excluding certain hedging transactions and certain active
business gains and losses); and, subject to certain exceptions, net income from notional
principal contracts.

    Subsidiary’s investments may generate foreign personal holding company

income under section 954(c), which is subpart F income. Fund therefore will include in
its income subpart F income of Subsidiary in accordance with section 951.
PLR-112863-11 4

Conclusion:

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

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 § 851(b)(2) of the
Code.

   Except as expressly provided herein, no opinion is expressed or implied

concerning the tax consequences of any aspect of any transaction or item discussed or
referenced in this letter. In particular, no opinion is expressed with regard to whether
Fund qualifies as a RIC under subchapter M of the Code.

   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,



                                   Susan Thompson Baker___________
                                   Susan Thompson Baker
                                   Senior Technician Reviewer, Branch 2
                                   Office of Associate Chief Counsel
                                   (Financial Institutions & Products)