Mortgage investment fund interests may qualify as registered-form pooled-fund obligations

Plain-English summary

A limited partnership planned to pool investor capital to hold U.S. mortgage loans and interests in affiliated mortgage funds. Some investors might be foreign persons, making the registered-form rules relevant to potential portfolio-interest treatment. The partnership represented that investors' rights to principal and interest distributions could be transferred only through its book-entry system. The IRS ruled that the partnership interests were similar evidence of interests in a similar pooled fund under Temp. Treas. Reg. § 1.163-5T(d)(1). If the separate registered-form requirements in Treas. Reg. § 5f.103-1(c)(1) were met, those interests would be obligations in registered form, but the IRS did not rule that payments actually qualified as portfolio interest.

Ruling snapshot

• Question: Are interests in the mortgage investment partnership pooled-fund instruments that can be treated as obligations in registered form?
• Outcome: Approved, conditioned on satisfying the registered-form requirements
• Key authorities: IRC §§ 163(f), 871(h), and 881(c); Temp. Treas. Reg. § 1.163-5T(d)(1); Treas. Reg. §§ 1.871-14 and 5f.103-1(c)

Full text (IRS public release)

 Internal Revenue Service                                       Department of the Treasury
                                                                Washington, DC 20224

 Number: 202110007                                              Third Party Communication: None
 Release Date: 3/12/2021                                        Date of Communication: Not Applicable
 Index Number: 163.08-00
                                                                Person To Contact:
 -----------------                                              --------------------, ID No. -----------------
 -----------------------------------------------                Telephone Number:
 -----------------------------                                  --------------------
 -------------                                                  Refer Reply To:
 -------------------------------------                          CC:FIP:B01
                                                                PLR-114147-20
                                                                Date:
                                                                December 10, 2020




LEGEND

Taxpayer                  =    ------------------------------------------------------------------------
State 1                   =    -----------------------------
Partnership               =    ----------------------------------------------
State 2                   =    -----------------------------


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

This is in response to your letter dated June 4, 2020, requesting that interests in
Taxpayer be considered “similar evidence of interest in a similar pooled fund” within the
meaning of section 1.163-5T(d)(1) of the Temporary Income Tax Regulations and that,
if the requirements of section 5f.103-1(c)(1) are satisfied, those interests in Taxpayer
will be considered obligations in registered form.

FACTS

Taxpayer is a limited partnership formed under the laws of State 1 and classified as a
partnership for federal income tax purposes. Taxpayer uses the calendar year as its
accounting period for federal income tax purposes and the accrual method as its overall
method of accounting. Investors, including some who may not be United States persons
within the meaning of section 7701(a)(30) of the Internal Revenue Code (the “Code”),
will contribute capital to Taxpayer in exchange for limited partnership interests in
Taxpayer. Taxpayer will use those capital contributions to invest in certain assets.

Taxpayer represents that Taxpayer will principally hold debt instruments and pass-
through certificates, as defined in section 1.163-5T(d)(1). Taxpayer’s principal business
is to use its investors’ capital contributions to acquire mortgage loans on commercial
and residential real estate located in the United States (the “Mortgages”). Taxpayer will
PLR-114147-20                                  2

also use capital contributions to acquire interests in Partnership, a limited liability
company formed under the laws of State 2 and classified as a partnership for federal
income tax purposes, and other affiliated funds that are classified as partnerships for
federal income tax purposes (the “Affiliated Funds”). The principal business of
Partnership and the Affiliated Funds is to use their investors’ capital contributions to
acquire Mortgages. Taxpayer represents that interests in Partnership and the Affiliated
Funds are pass-through certificates, as defined in section 1.163-5T(d)(1), and are in
registered form, as defined in section 5f.103-1(c).

Taxpayer represents that interests in Taxpayer are transferable only pursuant to
procedures described in section 5f.103-1(c)(1) and, therefore, are in registered form
within the meaning of that regulation. Specifically, the right to receive distributions of
principal and interest on the assets held by Taxpayer is transferable only through a
book entry system maintained by Taxpayer in accordance with the requirements of
section 5f.103-1(c)(2).

LAW AND ANALYSIS

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)(A) defines the
term “registration-required obligation” as any 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) of the Income Tax Regulations 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) 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.
PLR-114147-20                                   3

Section 1.871-14(d)(1) provides in part 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
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 any stated
interest with the issuer (or its agent) and may be transferred through both 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.

Taxpayer is classified as a partnership for federal income tax purposes. Taxpayer’s
principal assets are Mortgages that it holds directly and its interests in Partnership and
the Affiliated Funds. Taxpayer represents that its interests in Partnership and the
Affiliated Funds are pass-through certificates, as defined in section 1.163-5T(d)(1).
Taxpayer further represents that Taxpayer maintains a book entry system in
accordance with section 5f.103-1(c)(2) and that the right to receive distributions of
principal and interest on the assets held by Taxpayer is transferable only through such
book entry system.

CONCLUSION

We conclude that the interests in Taxpayer are “similar evidence 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 Taxpayer will be considered
obligations in registered form.

The ruling contained in this letter is based upon information and representations
submitted by 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.
PLR-114147-20                                  4

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 as to (1) whether Taxpayer’s
interests in Partnership or the Affiliated Funds are pass-through certificates, as defined
in section 1.163-5T(d)(1), (2) whether any payment of interest on the interests in
Taxpayer will qualify as portfolio interest for purposes of sections 871 and 881, or (3)
whether Taxpayer is engaged in a trade or business within the United States or whether
any payment of interest 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.




                                           Spence Hanemann
                                           Senior Counsel, Branch 1Office of the
                                           Associate Chief Counsel
                                           (Financial Institutions and Products)

Enclosure:
Copy for section 6110 purposes




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