Commodity-linked-note ruling was prospectively revoked while subsidiary ruling remained effective

Plain-English summary

Two funds had received rulings that income from certain commodity-linked notes and income from investments in subsidiaries counted as qualifying income under section 851(b)(2). The IRS later concluded that issuing a private ruling on the commodity-linked-note question no longer reflected its current position, so it revoked that portion of the earlier ruling. The subsidiary-income ruling was not revoked and remained effective. The funds also received section 7805(b) relief, limiting the commodity-linked-note revocation to notes acquired after June 30, 2017.

Ruling snapshot

• Question: Which parts of the funds' earlier qualifying-income ruling would be revoked, and would the revocation apply retroactively?
• Outcome: mixed, the commodity-linked-note ruling was prospectively revoked, while the subsidiary-income ruling remained effective
• Key authorities: IRC §§ 851(b)(2), 7805(b); Rev. Proc. 2017-1 § 11.04

Full text (IRS public release)

Internal Revenue Service                                       Department of the Treasury
                                                               Washington, DC 20224

Number: 201717024                                              Third Party Communication: None
Release Date: 4/28/2017                                        Date of Communication: Not Applicable
Index Number: 851.02-00, 7805.00-00
                                                               Person To Contact:
-----------------                                              ----------------------, ID No. ------------------
---------------------------                                    Telephone Number:
------------------------------------------------------------   ----------------------
--------                                                       Refer Reply To:
----------------------------------------                       CC:FIP:B01
------------------------------                                 PLR-132083-16
                                                               Date:
                                                               January 17, 2017




Legend

Fund 1                     =        ----------------------------------------------------------------
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Fund 2                     =        -----------------------------------------------------------
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Dear --------------:

This letter revokes a part of PLR 200842014 (PLR-112977-081) issued to Funds 1 and 2
(the “Funds”) on July 17, 2008, and, in response to a request from your authorized
representative dated December 27, 2016, limits the retroactive effect of such revocation
pursuant to section 7805(b) of the Internal Revenue Code.

In PLR 200842014, the Internal Revenue Service (the “Service”) issued rulings that (i)
income and gain from certain commodity-linked notes constitute qualifying income
under section 851(b)(2) (the “CLN Ruling”), and (ii) income derived by each Fund from
its investment in the Subsidiaries, whether or not attributable to subpart F income, is
income derived from the Funds’ business of investing in stock, securities, or currencies
and, therefore, constitutes qualifying income under section 851(b)(2) (the “Subsidiary
Ruling”). In a letter dated September 29, 2016, the Service notified the Funds that it

1
  PLR-112977-08 is the controlling PLR number for a multi-filer private letter ruling. Funds 1 and 2 were
assigned a separate PLR number. This letter refers to the controlling PLR number, but applies equally to
the rulings issued to both Funds under their respective, separately assigned PLR numbers.
PLR-132083-16                                 2

was considering revoking the CLN Ruling. On December 27, 2016, the Funds
requested that the Service exercise its discretionary authority under section 7805(b) to
limit the retroactive effect of any revocation.

Since issuing PLR 200842014, the Service has determined that having provided a
private letter ruling on the issue in the CLN Ruling is not in accord with the current views
of the Service. See Rev. Proc. 2016-50, 2016-43 I.R.B. 522, superseded by Rev. Proc.
2017-3, 2017-1 I.R.B.130, 140 (section 4.01(44)); see also REG-123600-16, 81 Fed.
Reg. 66576-77 (Sept. 28, 2016). Section 11.04 of Rev. Proc. 2017-1, 2017-1 I.R.B. 1,
61, provides, in part, that unless it was part of a closing agreement, a letter ruling found
to be in error or not in accordance with the current views of the Service may be revoked
or modified. Accordingly, the CLN Ruling in PLR 200842014 is revoked. The
Subsidiary Ruling is not revoked and that portion of PLR 200842014 remains in effect at
this time.

Section 11.04 of Rev. Proc. 2017-1 also provides that, if a letter ruling is revoked, the
revocation applies to all years open under the statute of limitations on assessments
unless the Service uses its discretionary authority under section 7805(b) to limit the
retroactive effect of the revocation. In accordance with the Funds’ request, the Service
has decided to grant relief under section 7805(b). The revocation of the CLN Ruling in
PLR 200842014 will apply prospectively only to commodity-linked notes acquired by the
Funds after June 30, 2017.

In accordance with the power of attorney on file with this office, we are sending a copy
of this letter to the Funds’ authorized representative. We are also sending a copy of this
letter to the appropriate operating division.

                                                  Sincerely,



                                                  -------------------------------------------
                                                  Julanne Allen
                                                  Assistant to the Branch Chief, Branch 3
                                                  Office of Associate Chief Counsel
                                                  (Financial Institutions and Products)




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