Loan interests recorded in a required book-entry register qualify as obligations in registered form

Plain-English summary

A business connects borrowers with investors for unsecured, fixed-rate loans originated by a partner bank. Its borrower agreement and promissory note appoint the business as the borrower's agent to maintain a register identifying every owner of a beneficial interest and the amounts owed to each owner. A transfer does not give the new owner a right to principal or interest until the transfer is recorded in that register. The IRS ruled that these terms make the loans transferable only through a qualifying book-entry system. The loans therefore are obligations in registered form under Temporary Income Tax Regulations § 5f.103-1.

Ruling snapshot

• Question: Are loans whose ownership and payment rights can be transferred only through the borrower's agent's register obligations in registered form?
• Outcome: approved
• Key authorities: Temp. Treas. Reg. §§ 5f.103-1(c)(1), (c)(2), and (e)

Full text (IRS public release)

Internal Revenue Service                                   Department of the Treasury
                                                           Washington, DC 20224

Number: 201806007                                          Third Party Communication: None
Release Date: 2/9/2018                                     Date of Communication: Not Applicable
Index Number: 149.01-00
                                                           Person To Contact:
-----------------------------------                        --------------------------------, ID No. ----------
----------------------------                               ------------------
------------------------------------------                 Telephone Number:
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                                                           Refer Reply To:
                                                           CC:FIP:05
                                                           PLR-122253-17
                                                           Date:
                                                           November 09, 2017



Legend

Taxpayer = ---------------------------------------------------------------------------------------------------
           ------------------------

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

This is in response to your letter dated July 18, 2017, requesting a ruling that certain
loans be considered obligations in registered form, as described in § 5f.103-1 of the
Temporary Income Tax Regulations.

Facts

Taxpayer operates a business in which it connects borrowers and investors. The loans
facilitated by Taxpayer’s operations are unsecured, fixed-rate, intermediate-term debt
and pay principal and interest on a monthly basis (each, a Loan). Each Loan is
originated by a bank with which Taxpayer has a business relationship.

To obtain a Loan facilitated by Taxpayer’s operations, a borrower must execute an
agreement (the Borrower Agreement) providing, among other things, that Taxpayer will
act as the servicer of any Loan obtained through Taxpayer. The Borrower Agreement
also provides that the borrower grants Taxpayer a limited power of attorney to execute
on the borrower’s behalf a promissory note that memorializes the Loan obtained
through Taxpayer’s operations (the Promissory Note). Both the Borrower Agreement
and the Promissory Note provide that the borrower appoints Taxpayer to be the
borrower’s agent for the purpose of maintaining a register for recording the name and
address of each owner of a beneficial interest in the Loan and the principal and interest
owed to each owner. The Borrower Agreement and the Promissory Note also provide
that the persons identified in the register as owners of the Loan are treated as the
owners of the Loan for all purposes. The Borrower Agreement and the Promissory Note
PLR-122253-17                                  2

further provide that, if a registered owner of the Loan transfers its beneficial interest in
the Loan to another person, the right of that transferee to payment of principal and
interest on the Loan is not effective until the transfer is recorded in the register.

Law

Section 5f.103-1(c)(1)(ii) provides in part that an obligation is in registered form if 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. 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. Section 5f.103-1(c)(2) further
provides that a book entry is a record of ownership that identifies the owner of an
interest in the obligation. Section 5f.103-1(e) provides in part that an obligation is not
considered to be in registered form as of a particular time if it can be transferred at that
time or at any time until its maturity by any means not described in § 5f.103-1(c).

Analysis

Both the Borrower Agreement and the Promissory Note provide that Taxpayer, acting
as the borrower’s agent, will maintain in the register a record of ownership that identifies
each owner of a beneficial interest in the Loan by name and address. Each such record
qualifies as a book entry within the meaning of the second sentence of § 5f.103-1(c)(2).

The Borrower Agreement and the Promissory Note both provide that the person
identified in a book entry as the owner of a beneficial interest in the Loan is treated as
the owner of that beneficial interest for all purposes, including payment of principal and
interest. This provision effectively requires that ownership of an interest in a Loan be
reflected in a book entry. Therefore, the Loans are considered transferrable through a
book entry system, as contemplated in the first sentence of § 5f.103-1(c)(2).

The Borrower Agreement and the Promissory Note both provide that a transferee of a
beneficial interest in a Loan has no right to payment of principal or interest on the Loan
until the transfer is recorded in the book entry system maintained by Taxpayer. Thus,
the right to principal and interest on the Loan may be transferred only through a book
entry system maintained by the borrower’s agent, as described in § 5f.103-1(c)(1)(ii).
No fact presented in the ruling request suggests that a Loan may be transferred outside
of this book entry system at any time prior to its maturity.
PLR-122253-17                                  3

Conclusion

We conclude that the Loans are obligations in registered form, as described in
§ 5f.103-1.

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 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.

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,
                         Associate Chief Counsel (Financial Institutions and Products)

                                              /S/

                   By:
                         Diana Imholtz
                         Special Counsel
                         (Financial Institutions & Products)