Interests in a mortgage-backed investment fund count as obligations "in registered form"

Plain-English summary

Under Section 163(f), interest on certain debt obligations is only deductible if
the obligation is "in registered form," meaning ownership is tracked through the
issuer or a book-entry system rather than by anonymous paper certificates.
Registered form also matters for foreign investors, who can receive U.S.
"portfolio interest" tax-free only on registered obligations. Here the taxpayer is
an LLC (taxed as a partnership) that pools investor money to buy pass-through
certificates in a trust holding U.S. real estate loans. It asked the IRS to
confirm that membership interests in the fund are "similar evidence of interest in
a similar pooled fund" and, if the book-entry requirements are met, count as
obligations in registered form. The IRS agreed. The ruling is narrow: it does not
decide whether the underlying certificates actually qualify, whether the interest
is tax-free portfolio interest, or whether the fund is engaged in a U.S. trade or
business.

Ruling snapshot

• Question: Are membership interests in the pooled mortgage-loan fund "similar
  evidence of interest in a similar pooled fund" that, if the book-entry
  requirements are met, are treated as obligations in registered form?
• Outcome: Approved (interests treated as registered form, subject to the
  regulation's conditions)
• Key authorities: IRC § 163(f); Treas. Reg. §§ 1.163-5T(d)(1), 5f.103-1(c),
  1.871-14

Full text (IRS public release)

 Internal Revenue Service                                Department of the Treasury
                                                         Washington, DC 20224

 Number: 202210018                                       Third Party Communication: None
 Release Date: 3/11/2022                                 Date of Communication: Not Applicable
 Index Number: 163.08-00
                                                         Person To Contact:
 ---------------------------------------                 -----------------, ID No. -----------------
 ----------------------                                  Telephone Number:
 --------------------------------------------            --------------------
 ----------------------------                            Refer Reply To:
 ----------------------------                            CC:FIP:B01
                                                         PLR-117588-21
                                                         Date:
                                                         December 13, 2021




LEGEND

 Taxpayer = -----------------------------------------------------------------
 State 1  = ------------------------------


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

This is in response to your letter dated August 2, 2021, 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 liability company 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 membership interests in
Taxpayer. Taxpayer will use those capital contributions to invest in certain assets.

Taxpayer represents that Taxpayer's principal assets will be pass-through certificates,
as defined in section 1.163-5T(d)(1). Taxpayer will use the capital contributions of its
members for the principal purpose of acquiring beneficial interests in a trust that
acquires and holds loans secured by real estate located in the United States (the
"Trust"). Taxpayer represents that beneficial interests in the Trust 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)(1).
PLR-117588-21                                   2


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. Taxpayer represents that 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's agent 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.

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
PLR-117588-21                                 3

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
principally holds beneficial interests in Trust, which interests are pass-through
certificates as defined in section 1.163-5T(d)(1). Taxpayer's agent maintains a book
entry system in accordance with section 5f.103-1(c)(2), and 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.

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 Trust 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.
PLR-117588-21                                  4


In accordance with the Power of Attorney on file with this office, a copy of this letter is
being sent to your authorized representatives.



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

Enclosure:
Copy for section 6110 purposes



cc: