Foreign regulatory trust is owned by its CFC grantor

Plain-English summary

A controlled foreign corporation established a foreign-law trust to segregate and conservatively invest assets required to support its regulated business obligations. A separate trustee managed the assets, while the CFC remained the sole unitholder, received all annual income, could receive principal, and could amend, revoke, or redeem its interest. The IRS classified the arrangement as a trust rather than a business entity and treated the CFC as its owner under the grantor-trust rules. The ruling would be void if the trust gained more than one unitholder and did not address treaty benefits or the trust's foreign-law tax classification.

Ruling snapshot

• Question: Was the foreign arrangement a trust for federal tax purposes, and was its controlled foreign corporation treated as the owner?
• Outcome: Approved on both issues, subject to the trust retaining a single unitholder
• Key authorities: IRC §§ 671, 672(f), 676, and 677; Treas. Reg. § 301.7701-4(a)

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201532023
Release Date: 8/7/2015

Third Party Communication: None
Date of Communication: Not Applicable

Index Number: 7701.03-00, 671.00-00,
672.05-00, 672.05-01

Person To Contact:

Telephone Number:

Refer Reply To:
CC:PSI:B01
PLR-141233-14

Date:
May 04, 2015

LEGEND

X =
CFC =
Trust =
Trustee =
Business =
Regulatory Body =
Date 1 =
Date 2 =
State A =
Country A =
Jurisdiction 1 =
Jurisdiction 2 =
Treaty =

PLR-141233-14 2

Trust Deed =
Law =

Dear :

This responds to a letter dated November 3, 2014, and subsequent correspondence,
submitted on behalf of X, CFC, Trustee and Trust, requesting a ruling on the application
of § 671 and § 7701 of the Internal Revenue Code.

FACTS

The following facts and representations were submitted by X:

X is a corporation organized under the laws of State A. As of Date 2, X is the owner of
CFC, a limited company incorporated in Jurisdiction 1 in Country A. CFC is a controlled
foreign corporation within the meaning of § 957(a) of the Code. CFC is engaged in
Business in Country A.

CFC established Trust by Trust Deed. Trust is governed by the laws of Jurisdiction 2 in
Country A. Under Law, Trust is a validly created trust. Trust is required to file tax
returns in Country A and has a Country A tax identification number.

CFC utilizes Trust to satisfy its requirements under Law to segregate, hold, and invest
assets to ensure that CFC is able to meet its obligations with respect to Business. Trust
and CFC are regulated by several government bodies in Country A, including
Regulatory Body.

Trustee is the trustee of Trust. Trustee is a limited company incorporated in Jurisdiction
2 in Country A on Date 1. Trustee was formed for the main purpose of serving as the
trustee of Trust. Under the Trust Deed, Trustee has broad powers to manage Trust
assets, including the power to buy and sell assets. Trustee has a duty to preserve and
protect the assets of Trust under Law. Trustee has an investment agreement with an
external asset manager. The investment agreement provides that the investment policy
of Trust is conservative and the objective of the investment strategy is to protect and
conserve Trust assets for the benefit of CFC to ensure that it has adequate resources
as required under Law.

The ownership of Trust is divided into units. Each unit represents an undivided
beneficial interest in the assets of Trust. CFC has at all times been the sole unitholder

PLR-141233-14 3

of Trust. CFC may not unilaterally assign or transfer all or a portion of its interest in
Trust without the consent of Trustee. X represents that, given the purpose of Trust, it is
not contemplated that CFC would transfer its interest in Trust.

Under the Trust Deed, all of Trust’s net income is required to be distributed annually to
CFC, as the sole unitholder of Trust. Trustee has discretion to distribute principal to
CFC. CFC may redeem its interest in Trust at any time, although in certain cases, CFC
may have to wait up to sixty days. CFC, as the sole unitholder, may also amend or
revoke Trust.

You have requested the following rulings:

1. Trust is classified as a trust for federal tax purposes under § 301.7701-4(a) of the
   Procedure and Administration regulations.

2. CFC will be treated as the owner of Trust for purposes of § 671 of the Code.

LAW AND ANALYSIS

Ruling 1

Section 301.7701-1(a) provides, in part, that the Code prescribes the classification of
various organizations for federal tax purposes. Whether an organization is an entity
separate from its owners for federal tax purposes is a matter of federal tax law and does
not depend on whether the organization is recognized as an entity under local law.

Section 301.7701-1(b) 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 Code provides for special treatment of that
organization.

Section 301.7701-4(a) provides, in part, that generally the term “trust” as used in the
Code refers to an arrangement created either by a will or by an inter vivos declaration
whereby trustees take title to property for the purpose of protecting or conserving it for
the beneficiaries under the ordinary rules applied in chancery or probate court. Usually
the beneficiaries of such a trust do no more than accept the benefits thereof and are not
the voluntary planners or creators of the trust arrangement. However, the beneficiaries
of such a trust may be the persons who create it and it will be recognized as a trust
under the Code if it was created for the purpose of protecting or conserving the trust
property for beneficiaries who stand in the same relation to the trust as they would if the
trust had been created by others for them. Generally, an arrangement will be treated as
a trust under the Code 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.

PLR-141233-14 4

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

Ruling 2

Section 671 provides, in part, that where it is specified in subpart E, part I, subchapter J
(Subpart E) that the grantor or another person shall be treated as the owner of any
portion of a trust, there shall then be included in computing the taxable income and
credits of the grantor or the other person those items of income, deductions, and credits
against tax of the trust which are attributable to that portion of the trust to the extent that
such items would be taken into account under this chapter in computing taxable income
or credits against the tax of an individual.

Section 672(f)(1) and § 1.672(f)-1 provide that subpart E (§§ 671 through 679) applies
only to the extent such application results in an amount (if any) being currently taken
into account (directly or through one or more entities) under this chapter in computing
the income of a citizen or resident of the United States or a domestic corporation.

Section 672(f)(3)(A) provides, in part, that a controlled foreign corporation (as defined in
§ 957) shall be treated as a domestic corporation for purposes of § 672(f)(1).

Section 676(a) provides that the grantor shall be treated as the owner of any portion of
a trust, whether or not he is treated as such owner under any other provision of part I,
subchapter J, chapter 1, where at any time the power to revest in the grantor title to
such portion is exercisable by the grantor or a nonadverse party, or both.

Section 677(a) provides, in part, that the grantor is treated as the owner of any portion
of a trust whose income, without the approval or consent of any adverse party is, or, in
the discretion of the grantor or a nonadverse party, or both, may be distributed, or held
or accumulated for future distribution, to the grantor or the grantor’s spouse.

According to the information submitted, CFC is a controlled foreign corporation as
defined in § 957. Thus, § 672(f)(1) will not prevent CFC from being treated as the
owner of Trust for purposes of § 671 if CFC is otherwise treated as the owner under
Subpart E.

Under the Trust Deed, Trustee is required to pay all Trust income to CFC and Trustee is
authorized to pay, in its discretion, amounts from principal to CFC. Further, CFC may
amend or revoke trust or alternatively redeem its interest in Trust at any time.
Therefore, CFC will be treated as the owner of Trust under §§ 676(a) and 677(a).

PLR-141233-14 5

CONCLUSION

Based solely on the facts submitted and the representations made, we conclude as
follows as of Date 2:

1. Trust is classified as a trust for federal tax purposes under § 301.7701-4(a).

2. CFC will be treated as the owner of Trust for purposes of § 671.

The rulings contained in this letter are based upon information and representations
submitted by the taxpayer and accompanied by a penalty of perjury statement executed
by an appropriate party. While this office has not verified any of the material submitted
in support of the request for rulings, it is subject to verification on examination.

Except as specifically set forth above, no opinion is expressed or implied concerning the
tax consequences of any aspect of any transaction or item discussed or referenced in
this letter. Specifically, no opinion is expressed regarding Trust or CFC’s entitlement to
treaty benefits under Treaty, which depends on the tax classification of Trust under
Country A law and not United States tax law. Further, this ruling will be void if Trust has
more than one holder of unit interests.

This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) provides that
it may not be used or cited as precedent.

Pursuant to a power of attorney on file with this office, a copy of this letter is being sent
to X’s authorized representative.

Sincerely,

Faith P. Colson
Faith P. Colson
Senior Counsel, Branch 1
Office of the Associate Chief Counsel
(Passthroughs & Special Industries)

Enclosures (2)

Copy of this letter
Copy of this letter for section 6110 purposes

cc: