Book-entry partnership interests in a student-loan pool qualify as registered obligations

Plain-English summary

A taxpayer proposed holding nearly all of a partnership that would acquire and manage a pool of student loans. Partnership interests could be transferred only with the general partner's consent and through a maintained ownership register and book-entry system. The IRS concluded that those interests were similar evidence of an interest in a pooled fund and would be obligations in registered form if the transfer procedures satisfied the temporary regulations. The ruling did not decide whether payments on the interests would qualify as portfolio interest or whether the partnership or its investors would be engaged in a U.S. trade or business.

Ruling snapshot

• Question: Will partnership interests backed by a student-loan pool be obligations in registered form when transfers occur only through prescribed registration and book-entry procedures?
• Outcome: Approved, if the requirements of Temp. Treas. Reg. § 5f.103-1(c)(1) are satisfied.
• Key authorities: IRC § 163(f); Temp. Treas. Reg. §§ 1.163-5T(d)(1) and 5f.103-1(c); Treas. Reg. §§ 1.871-14 and 301.7701-4(c)(1)

Full text (IRS public release)

Internal Revenue Service                             Department of the Treasury
                                                     Washington, DC 20224

Number: 201614026                                    Third Party Communication: None
Release Date: 4/1/2016                               Date of Communication: Not Applicable
Index Number: 163.08-00
                                                     Person To Contact:
----------------------------------------------       ---------------, ID No. -----------
--------------------------------                     Telephone Number:
--------------------------------------               --------------------
--------------------------------                     Refer Reply To:
                                                     CC:FIP:B02
                                                     PLR-133645-15
                                                     Date:
                                                     January 05, 2016




Legend


Taxpayer = --------------------------------
           -------------------------
Country  = ---------------------
State    = ------------


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

       This is in response to your letter dated September 14, 2015, requesting that
certain interests held in a partnership will be considered obligations in registered form, if
the interests in the partnership are transferable according to the procedures described
in section 5f.103-1(c) of the Temporary Income Tax Regulations.

                                                 FACTS

      Taxpayer is an exempted company organized under the laws of Country.
Taxpayer uses the calendar year as its accounting period for federal income tax
purposes and an accrual method as its overall method of accounting.

       Taxpayer is directly owned by a State limited partnership (“Domestic Feeder”)
and two exempted companies, each formed under the laws of Country and classified as
a partnership for U.S. federal income tax purposes (each a “Foreign Feeder”). The
primary activity of Domestic Feeder and Foreign Feeders will be to raise money from
U.S. and foreign investors to purchase their respective interests in Taxpayer. Taxpayer
will use the amounts it receives as capital contributions from Domestic Feeder and
Foreign Feeders to acquire interests in a limited partnership expected to be organized
PLR-133645-15                                 2

under the laws of State and treated as a partnership for federal income tax purposes
(“Partnership”).

       Taxpayer will hold an approximately 99 percent interest in Partnership.
Partnership will have the ability to acquire student loans, accept additional capital
contributions and use principal pay downs on the loans it holds to finance acquisition of
additional student loans. Therefore, Taxpayer represents that Partnership will have the
power to vary the investments it holds. Taxpayer further represents that it will not
operate in a manner that will cause Foreign Feeders to be engaged in the conduct of a
trade or business in the United States within the meaning of sections 871(b) or
888(a)(1) of the Internal Revenue Code.

        Partnership will use the amounts it receives as capital contributions from
Taxpayer and other partners to acquire student loans in the secondary market (“the
Student Loans”). Taxpayer represents that the Student Loans are not in registered form
within the meaning of section 5f.103-1(c). Partnership will acquire the Student Loans
with the intent to hold them as capital assets for investment until maturity and will not be
a trader or dealer in the Student Loans or other property.

       Taxpayer represents that interests in Partnership will be transferable only
pursuant to procedures described in section 5f.103-1(c)(1) and therefore are in
registered form within the meaning of this regulation. Specifically, the following
procedures will be used for transfer of interests in the Partnership.

       First, under applicable law and under the terms of the limited partnership
agreement, the general partner will be obligated to keep a full and accurate register of
the interests in Partnership. Only those persons that are listed as partners of
Partnership on a “schedule of partners” will be entitled to a distributive share of
Partnership’s income with respect to the Student Loans. The “schedule of partners” will
be a schedule maintained by the general partners containing the following information
with respect to each partner in Partnership: name, address, date of admission, amount
and date of all capital contributions, and the amount and date of any transfers to which
the general partner consents.

       Second, the interests in Partnership will be transferred only with written consent
of the general partner, which the general partner will have the right to withhold at its sole
discretion. The transferee will become a member of Partnership only when the general
partner enters the transferees name on the “schedule of partners”. The ownership of an
interest in Partnership will be required to be reflected in a book entry that identifies the
owner of an interest and will be transferable only through a book system maintained by
Partnership and its general partner, in accordance with the requirements of section
5f.103-1(c)(2). As a result, the right to receive a distributive share of Partnership’s
income attributable to principal and interest with respect to the Student Loans will be
PLR-133645-15                                  3

transferable only through a book entry system maintained by Partnership, in accordance
with the requirements of section 5f.103-1(c)(2).

        Taxpayer represents that its business purpose in creating this investment
structure is to provide investors in Domestic and Foreign Feeders with the ability to
invest in a pool of student loans and to receive a return on their investment that is
above-market on a risk-adjusted basis. Furthermore, this investment structure enables
the investors in Taxpayer to invest in a pool of student loans without incurring the
significant administrative costs of creating multiple grantor trusts.

                                             LAW

        Section 163(f)(1) disallows a deduction for interest on any registration-required
obligation unless the obligation is in registered form. Section 163(f)(2) defines the term
“registration-required obligation” as an obligation (including any obligation issued by a
governmental entity) other than an obligation which (i) is issued by a natural person, (ii)
is not of a type offered to the public, or (iii) has a maturity (at issue) of not more than
one year.

        Section 1.163-5T(d)(1) provides that a pass-through or participation certificate
evidencing an interest in a pool of mortgage loans, which under Subpart E of
Subchapter J of the Code is treated as a trust of which the grantor is the owner (or
similar evidence of interest in a similar pooled fund or pooled trust treated as a grantor
trust) (“pass-through certificate”), is considered to be a “registration-required obligation”
under section 163(f)(2)(A) and section 1.163-5(c), if the pass-through certificate is
described in section 163(f)(2)(A) and section 1.163-5(c) without regard to whether any
obligation held by the fund or trust to which the pass-through certificate relates is
described in section 163(f)(2)(A) and section 1.163-5(c).

        Section 1.871-14(a) of the Income Tax Regulations provides that no tax shall be
imposed under section 871(a)(1)(A), 871(a)(1)(C), 881(a)(1) or 881(a)(3) on any
portfolio interest as defined in sections 871(h)(2) and 881(c)(2) received by a foreign
person. Under sections 871(h)(2) and 881(c)(2), interest must be paid on an obligation
that is in registered form to qualify as portfolio interest. The term “registered form” has
the same meaning given such term by section 163(f). Sections 871(h)(7) and 881(c)(7).
Section 1.871-14(c)(1)(i) provides that the conditions for an obligation to be considered
in registered form are identical to the conditions described in section
5f.103-1.

        Section 1.871-14(d)(1) provides that interest received on a pass-through
certificate qualifies as portfolio interest if the interest satisfies the conditions in section
1.871-14(c)(1) without regard to whether any obligation held by the fund or trust to
which the pass-through certificate relates is described in section 1.871-14(c)(1)(ii). This
paragraph only applies to payments made to the holder of the pass-through certificate
PLR-133645-15                                  4

from the trustee of the pass-through trust and does not apply to payments made to the
trustee of the pass-through trust.

        Section 5f.103-1(c)(1) provides generally that an obligation is in registered form if
(i) the obligation is registered as to both principal and any stated interest with the issuer
(or its agent) and transfer of the obligation may be effected only by surrender of the old
instrument and either the reissuance by the issuer of the old instrument to the new
holder or the issuance by the issuer of a new instrument to the new holder, (ii) the right
to the principal of, and stated interest on, the obligation may be transferred only through
a book entry system maintained by the issuer (or its agent) as described in section
5f.103-1(c)(2), or (iii) the obligation is registered as to both principal and stated interest
with the issuer (or its agent) and may be transferred through most of the methods
described in (i) and (ii) above.

        Section 5f.103-1(c)(2) provides that an obligation will be considered transferable
through a book entry system if the ownership of an interest in the obligation is required
to be reflected in a book entry, whether or not physical securities are issued. A book
entry is a record of ownership that identifies the owner of an interest in the obligation.

       Section 301.7701-4(c)(1) of the Procedure and Administration Regulations
provides that an investment trust with a single class of undivided beneficial interest in
the trust assets is classified as a trust if there is no power under the trust agreement to
vary the investment of the certificate holders.

                                         ANALYSIS

       The purpose of the registration requirement for certain obligations is to prevent
the underreporting of tax on gains on sales on both taxable and tax-exempt securities
and to ensure that securities will be sold (or resold in connection with the original issue)
only to persons who are not United States persons. See section 1.163-5(c)(1)(i).

        Taxpayer has represented that the Student Loans are not in registered form.
Section 1.163-5T(d)(1) provides that an interest (a “pass-through certificate”) in a trust
that is treated as a grantor trust is considered to be an obligation in registered form if
the pass-through certificate is in registered form “without regard to whether any
obligation held by the fund or trust to which the pass-through certificate relates” is in
registered form. Taxpayer has represented that Partnership is not treated as a grantor
trust under section 301.7701-4(c)(1).

        Partnership will acquire multiple Student Loans and hold those loans as a single
pool of assets. Partnership will distribute income received on the pool of Student Loans
to its partners as an aggregated stream of income, without regard to particular Student
Loans in the pool. In this manner, the Student Loans held by Partnership are similar to
a pool of mortgage loans.
PLR-133645-15                                  5


       In this case, the interests in Partnership will be transferable only pursuant to the
procedures described in section 5f.103-1(c)(1). Interests in Partnership will be
transferred in accordance with section 5f.103-1(c)(1)(i). Furthermore, Partnership will
maintain a book entry system (as described in section 5f.103-1(c)(2)), and the right to
receive distributions of principal and interest on the Student Loans will be transferable
only by this book entry system.

                                       CONCLUSION

       We conclude, based on the facts of this case, that the interests in Partnership are
similar evidences of interest in a similar pooled fund within the meaning of section
1.163-5T(d)(1), and that, if the requirements of section 5f.103-1(c)(1) are satisfied, the
interests in Partnership will be considered obligations in registered form.

       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 or implied regarding
whether any payment of interest on the interests in Partnership will qualify as portfolio
interest for purposes of sections 871 and 881. Furthermore, no opinion is expressed or
implied as to whether Partnership is engaged in a trade or business within the United
States or whether the interest in Partnership is effectively connected with that trade or
business.

      This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3) of
the Code 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 your authorized representative.

                                       Sincerely,


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