United States: Service Applies Substance Over Form Doctrine To DisallowDividends-Received Deduction

IRS employed a detailed analysis and several judicial doctrines to disallow a taxpayer's attempt to deduct 100% of the dividends it received from a regulated investment company after purposefully routing investments abroad via a controlled foreign corporation.

In CCA 201320014, the IRS concluded that, under the substance over form doctrine, a U.S. taxpayer was not eligible for the Section 245dividends-received deduction with respect to funds distributed to it from a regulated investment company (RIC) (i.e., a mutual fund) through a newly formed controlled foreign corporation (CFC). In reaching this conclusion, the Service looked to the congressional intent of the applicable statutes and determined that the substance of the transaction was inconsistent with such intent.

The CCA also concluded that the transaction should be recast in one of two alternative ways. Under the first alternative, the Service would apply the step transaction doctrine to disregard the intermediate transfers through the CFC and treat the common parent as receiving the distributions directly from the RIC. Under the second alternative, the IRS would treat the distributions as Section 951(i.e., Subpart F) inclusions. In either scenario, the common parent would not be eligible for the Section 245dividends-received deduction.

The result in the CCA was not all that surprising, given that the U.S. parent (1) interposed the CFC for the sole purpose of converting income that would have been fully taxable into income that purportedly was eligible for an 80% dividends-received deduction, and (2) sold the shares in the CFC to a related partnership before the end of the tax year to avoid having a Subpart F inclusion. Nevertheless, CCA 201320014is noteworthy in that it demonstrates the Service's position regarding highly structured transactions undertaken with a principal purpose of generating a dividends-received deduction.

Background

Under Section 245(a), a U.S. corporation is allowed a deduction on dividends received from a qualified 10%-owned foreign corporation. The amount of the deduction is equal to the percentage (specified under Section 243for the tax year) of the U.S. source portion of such dividends. The deductible amount will be either 70%, 80%, or 100%, depending on the percentage ownership. The U.S. source portion of the dividend is essentially the ratio of (1) the foreign corporation's post-1986 E&P that has been subject to U.S. federal income tax on a net basis and that has not been distributed, to (2) the corporation's total accumulated E&P. 1

A dividend received from a RIC, however, generally is not eligible for the dividends-received deduction, except to the extent that the RIC identifies the distribution as a dividend eligible for the deduction. 2The amount of dividends a RIC can identify as eligible in a tax year generally is limited to the amount of dividends that it receives from domestic corporations in that year that would give rise to a dividends-received deduction in the hands of the RIC if it were permitted to claim such deduction.3 In addition, while a RIC may not take a dividends-received deduction under Section 243or 245, it generally is able to take a deduction on dividends paid. 4

In general, a CFC is a foreign corporation that is more than 50% owned (directly, indirectly, or constructively) by 10% U.S. shareholders. 5 Section 951(a)generally provides that if a foreign corporation is a CFC for an uninterrupted period of 30 days or more during a tax year, each "U.S. shareholder" that owns stock of the CFC on the last day of the CFC's tax year must include in income the shareholder's pro rata share of the CFC's Subpart F income.

As discussed above, the amount of a U.S. shareholder's Section 951inclusion is based in part on the shareholder's "pro rata share" of the CFC's Subpart F income. If the foreign corporation is a CFC for its entire tax year, a U.S. shareholder's pro rata share generally is the amount that would have been distributed to the shareholder with respect to its ownership interest if the CFC had distributed its Subpart F income for the tax year. Thus, "pro rata share" generally is based on the U.S. shareholder's percentage of CFC stock ownership.

Special rules for determining pro rata share apply when there is a change in ownership during a CFC's tax year, and the CFC's status as a CFC is not changed. Under Section 951(a)(1), the selling U.S. shareholder does not include a Section 951inclusion in income. 6Instead, only the acquiring U.S. shareholder includes a Section 951inclusion (provided the acquiring U.S. shareholder holds the CFC shares on the last day of the CFC's tax year). In addition, under Section 951(a)(2), the amount of the acquiring shareholder's Section 951inclusion is reduced by all or a portion of any dividends paid to the selling shareholder with respect to the transferred shares during the tax year.

In general, foreign persons are subject to U.S. federal income tax on two categories of income:

  • Income that is effectively connected with the conduct of a trade or business within the U.S. is taxed at graduated rates on a net basis.
  • U.S. source income that is not effectively connected with a U.S. trade or business (otherwise known as FDAP income) is subject to a 30% withholding tax. 7Under Sections 871(h)and 881(c), "portfolio interest" paid to foreign persons generally will be exempt from the 30% U.S. withholding tax. Sections 871(k)and 881(e)generally exempt interest-related dividends paid to a foreign person by a RIC from the 30% withholding tax. In effect, these provisions give the foreign investor in a RIC that holds U.S. source interest-paying investments the same tax result as if the investor had directly invested in the underlying interest-paying investment.

The CCA Transaction

The taxpayer (Common Parent) was a domestic corporation that was the parent of an affiliated group of U.S. corporations that filed a U.S. consolidated return ("US Group"). Common Parent directly owned all of the stock of Member, a member of US Group. Member received a significant amount of cash from its customers as collateral ("customer funds"). Due to regulatory requirements, Member was generally required to invest the customer funds only in high-grade liquid assets. Common Parent and subsidiary members of US Group concluded that a better after-tax return on the investment of Member's cash could be earned if instead of continuing to have Member make direct investments, it routed the cash through a series of entities, including a foreign entity.

To achieve this result, Common Parent formed a CFC and caused the CFC to invest in a RIC. The CFC did not have its own employees. Rather, the CFC paid the employees of Common Parent and other members of US Group to oversee RIC's investment activities. During the tax year, the RIC invested in domestic high-grade securities and primarily earned interest income on these investments. The RIC paid dividends to the CFC, and, in turn, claimed a dividends-paid deduction with respect to those dividends. The RIC did not withhold any U.S. federal income tax on behalf of the CFC because the CFC reported to the RIC that it was the beneficial owner of the RIC shares and that the dividends were exempt from U.S. withholding tax under Section 881(e).

Prior to the close of the CFC's tax year, Common Parent transferred all of its CFC's shares to a domestic partnership. Common Parent owned a percentage of the partnership directly and owned the remaining percentage indirectly through other partnerships and another member of US Group.

The taxpayer anticipated that the transaction would allow US Group to reduce its U.S. federal income tax on the income earned on its investment by 80%. Under the taxpayer's analysis:

  • The RIC would not pay U.S. federal income tax on its interest income as a result of a dividends-paid deduction under Sections 852(b)(2)(D)and 852(b)(3)(A).
  • The dividends paid by the RIC to the CFC would not be subject to U.S. withholding tax under Sections 871(k)and 881(e).
  • Common Parent would not have a Subpart F inclusion under Section 951with respect to the CFC because Common Parent would dispose of its entire interest in the CFC before the close of the CFC's tax year and the CFC would remain a CFC after the disposition.
  • Common Parent would include as dividend income its distributions from the CFC that were attributable to distributions from the RIC, the entire amount of which would be considered U.S. source income under Section 245(a)(3).
  • Common Parent would offset the dividends received with an 80% dividends-received deduction under Section 245(a).

The taxpayer's position. The taxpayer acknowledged that this indirect investment strategy was structured to increase its return on the investment of the customer funds by the amount of the Section 245dividends-received deduction. The taxpayer asserted, however, that it had a valid business purpose for the transaction-to invest its customer funds-and that its analysis was consistent with the form of its transaction and the literal language of the applicable Code provisions.

The Service's Analysis

The Service initially applied the substance over form doctrine to challenge the purported tax benefits claimed by the taxpayer. In general, this doctrine allows the courts and the IRS to disregard the form of a transaction to determine its proper tax treatment based on the actual substance of the transaction. In the seminal case Gregory v. Helvering, 14 AFTR 1191,293 US 465,79 L Ed 596,1935-1 CB 193 (1935), the Supreme Court held that although the taxpayer has the legal right to reduce his tax liability by any legal means, merely satisfying the statute is not enough; the substance of the transaction, apart from the tax motive, must be what the statute intended. In that case, the Court found that the transaction, though conducted according to statutory terms, had no business or corporate purpose and was "an elaborate and devious form of conveyance masquerading as a reorganization."

Under the substance over form doctrine, the transaction is viewed as a whole, taxation depends on the substance of the transaction, and formalisms that exist solely to alter tax liabilities will be disregarded. 8Nevertheless, where the facts indicate a "genuine multiple-party transaction with economic substance which is compelled or encouraged by business or regulatory realities, is imbued with tax-independent considerations, and is not shaped solely by tax-avoidance features," the Court held that the form of the transaction should be respected. 9

Citing Gregory v. Helvering, the IRS contended that the key question for determination in CCA 201320014was "whether what was done, apart from the tax motive, was the thing which the statute intended." (Emphasis in original.)

The Service argued that although the stated purpose of the transaction (i.e., the investment of customer funds) was a valid business purpose, Common Parent's use of the CFC and RIC was necessitated by tax planning rather than meaningful business exigencies. The IRS contended that routing the customer funds through the intermediate entities was counterproductive to Member's liquidity needs. The IRS also pointed out that this indirect investment strategy involved significant costs that, but for the tax savings, would actually reduce the taxpayer's net return. Further, the Service noted, given the fact that Common Parent owned almost all of the interests in RIC, Common Parent did not derive any of the classic benefits of an investor in a RIC, such as diversification, professional management, liquidity, and cost efficiency.

Based on these factors, the IRS contended that Common Parent's indirect investment strategy was not a genuine multiple-party transaction compelled by business needs, nor was the structure imbued with tax-independent considerations. Most important, the IRS added, the entire transaction and its purported U.S. federal income tax result were not consistent with congressional intent with respect to the applicable statutes.

Intent of the statutes. Citing the Revenue Act of 1918, the IRS noted that Congress's intent in enacting the predecessor of Section 243was to eliminate or minimize multiple taxation of corporate earnings as dividends pass from one corporation to another. Congress intended to tax income once at the corporate level and once again at the (noncorporate) shareholder level. The dividends-received deduction, the Service contended, was intended to apply when the issuing corporation already had been taxed on the earnings, in order to avoid a second corporate tax.

Likewise, the intent of Section 245was to ensure that only a single level of corporate tax is imposed on U.S. source income, which is consistent with the general intent of Section 243. The IRS pointed out that in connection with the 1988 enactment of TAMRA, Congress clearly stated that dividends eligible for the Section 245dividends-received deduction are allowed only for earnings that have been subject to net-basis U.S. corporate income tax. In the CCA, the IRS argued that it would be inconsistent with the policies of Sections 243and 245to allow a deduction for dividends attributable to U.S. source earnings that had not been subject to any U.S. corporate-level tax.

Further, the Service contended, in enacting and amending Section 854(b), Congress intended to limit the use of the dividends-received deduction by RIC shareholders. Specifically, the IRS noted, Congress expressed concern that the rules previously in effect under Section 854(b)allowed a taxpayer to convert interest income into dividend income. As a result, Congress amended Section 854(b)so that shareholders of a RIC may not treat a dividend received from the RIC as a dividend eligible for the dividends-received deduction except to the extent that the RIC identifies the distribution as a dividend eligible for the deduction.

A RIC dividend is eligible for the dividends-received deduction only to the extent that the RIC received dividends that would qualify for the dividends-received deduction if the RIC were allowed such deduction. In CCA 201320014, the RIC did not receive any dividends that would qualify for a dividends-received deduction if the RIC were allowed the deduction, and therefore no portion of the RIC's distributions was eligible. Thus, the IRS noted, if Common Parent or another member of US Group had directly invested in the RIC, it would have been subject to U.S. federal income tax on the dividends it received from the RIC and it would not have been entitled to offset dividends from the RIC with the dividends-received deduction.

In addition, the IRS argued that the transaction was inconsistent with the intent of the Section 881(e)withholding tax exception. As noted above, Sections 871(k)and 881(e)generally exempt interest-related dividends paid to a foreign person by a RIC. The purpose of Section 881(e), the Service stated, was to encourage foreign investors to invest in the U.S. and to enhance U.S. access to international capital markets. The intent of Sections 871(k)and 881(e), the IRS argued, was to give the foreign investor the same tax result as if the investor had directly invested in the underlying interest-paying investment.

Accordingly, if the foreign investor is a CFC, the U.S. shareholders of the CFC generally would include the interest-related dividends in income under Section 951. 10In CCA 201320014, the IRS stated, the ultimate investor in the U.S. source interest-paying investments was a U.S. company, rather than a foreign investor as intended by Congress. It was not Congress's intent to allow U.S. taxpayers to avoid U.S. income tax by investing through a CFC.

Moreover, the Service noted, the substance of the transaction also was inconsistent with the intent of the Subpart F rules. The IRS stated that Congress enacted Section 951and the related provisions to prevent U.S. taxpayers from deferring U.S. federal income tax on certain investment income earned through a foreign corporation. The rule that provides that a U.S. shareholder does not have a Section 951inclusion when it transfers interest to another U.S. person during the CFC's tax year is designed to avoid double taxation of the shareholders, the IRS contended, not to avoid U.S. federal income tax.

The IRS argued that Common Parent's plan to terminate its direct ownership of CFC was not compelled by a business purpose, but instead by a motivation to avoid a Section 951income inclusion. The Service also noted that there is no evidence that Congress intended a former U.S. shareholder to manipulate the Subpart F rules to achieve a better tax result by transferring its interests in the CFC prior to the end of the CFC's year.

Finally, the IRS pointed out, Congress generally intended that a CFC that received an interest-related dividend would include the full amount of the dividend in the CFC's Subpart F income, which generally would result in Section 951inclusion for the CFC's U.S. shareholders. The dividends-received deduction is not allowed with respect to Section 951inclusions or distributions of Subpart F earnings that are included in the income of a U.S. shareholder.

Application of substance over form doctrine. Based on its analysis of the intent of the applicable provisions, the Service determined that the taxpayer's transaction provided a result that was contrary to the intent of Sections 245(a)and 881(e). The IRS concluded that the taxpayer structured the transaction to use various Code provisions to shield 80% of its interest income and capital gain from all U.S. federal income tax.

In substance, the Service contended, the customer funds were used to make investments that gave rise primarily to domestic interest income and, to a lesser extent, capital gains income. Had Common Parent directly invested the customer funds, the IRS argued, it would have been subject to U.S. federal income tax on the interest income and capital gains it earned on the investment, as interest income and capital gains are not eligible for the dividends-received deduction. Likewise, if Common Parent had directly invested in the RIC, it would have been subject to U.S. income tax on the dividends it received from the RIC because the interest income and capital gains earned by RIC were not eligible for a dividends-received deduction.

To avoid this result, Common Parent routed the customer funds through the CFC and the RIC. This strategy, argued the IRS, did not serve a meaningful business purpose but was merely a contrivance to avoid U.S. federal income tax by converting what otherwise would be taxable interest income into dividend income eligible for the dividends-received deduction.

Having concluded that the taxpayer's transaction was contrived to avoid tax liability, the IRS determined the transaction must be recast in accordance with its substance rather than its form. One approach, the Service contended, was to apply the step transaction doctrine to treat Common Parent as directly investing in the RIC and receiving distributions directly from the RIC. Under this approach, Sections 951and 881(e)would not be implicated and the distribution of dividends from the RIC to Common Parent would not be eligible for the dividends-received deduction. The IRS noted that this result was consistent with the intent of Sections 243and 854.

Alternatively, the Service suggested, the same result could be reached by treating Common Parent's income (attributable to dividends paid by the RIC to the CFC) as Subpart F income, which also is not eligible for the dividends-received deduction. This approach, the IRS noted, is consistent with the intent of Sections 881, 245, and 951.

Step transaction doctrine. In general, the step transaction doctrine is a judicial doctrine that treats a series of formally separate steps as a single transaction if such steps are in substance integrated, interdependent, and focused toward a particular result. The step transaction doctrine is applied if the transaction meets one of three tests:

(1) The binding commitment test.

(2) The interdependence test.

(3) The end result test.

Under the binding commitment test, the steps are collapsed if, at the time of the first step, there was a binding commitment to undertake the later step. The interdependence test focuses on whether the "steps are so interdependent that the legal relations created by one transaction would have been fruitless without a completion of the series." 11Under the end result test, the doctrine is applied if it appears that a series of formally separate steps are prearranged parts of a single transaction intended from the outset to reach the ultimate result.

Under the facts in CCA 201320014, the IRS concluded that the intermediate step of routing the customer funds through the CFC had no independent purpose. The Service argued that the taxpayer took each step in the transaction in furtherance of its plan to offset income with a dividends-received deduction, and each individual step of the RIC investment would have been "fruitless" without the completion of the entire preplanned series of steps. The CFC did not have an independent business purpose, other than tax avoidance, for participating in the RIC transaction, and other than the intended tax benefits, the taxpayer's indirect investment strategy did not make economic sense, the IRS argued.

The Service also contended that the objective from the outset was to have the CFC distribute its RIC dividends to Common Parent and to have Common Parent dispose of its shares in the CFC just before the end of the CFC's tax year. Accordingly, the IRS argued, under the interdependence test of the step transaction doctrine, Common Parent's use of the CFC to purchase the RIC shares should be ignored and Common Parent should be treated as directly purchasing the RIC shares.

The IRS also noted that the binding commitment test of the step transaction doctrine would likewise be satisfied by the facts in the CCA. The binding commitment test generally is applied when the parties have entered into a binding contract to carry out the transaction steps. In the CCA, the IRS argued, there was no need for Common Parent to enter into a written contract with the CFC to ensure that the CFC would distribute all of the RIC dividends to Common Parent, as there was no risk that the CFC would deviate from the plan. The CFC was controlled by Common Parent, did not have its own employees, and all of its activities were carried out by employees of members of US Group. Thus, the IRS argued, given Common Parent's control over the CFC, the outcome of the RIC transaction was even more predictable than a contractual arrangement between unrelated parties.

Based on this analysis, the IRS concluded that Common Parent used the CFC as an intermediary to circumvent the intent of Section 854and to convert interest and capital gain income into dividends. As such, the Service concluded that the step transaction doctrine had to be applied to the transaction in order to prevent the taxpayer from subverting the legislative purpose and restore the proper tax result intended by the statute. Under the Service's analysis of the step transaction doctrine, the transfers through the CFC would be disregarded and Common Parent would be treated as receiving distributions directly from the RIC. As a result, Common Parent would not be entitled to the dividends-received deduction under Sections 243and 854.

Section 951 inclusion. Under the Service's alternative analysis, distributions from the CFC to Common Parent (attributable to the RIC's E&P) should be recharacterized as Section 951inclusions rather than dividends under Section 301. The dividends-received deduction generally is not allowed with respect to Section 951inclusions or distributions of Subpart F earnings that were included in the income of a U.S. shareholder. Had Common Parent not transferred its interest in the CFC to the partnership, it would have had a Section 951inclusion and the distribution from the CFC would have been excluded from income under Section 959. Instead, because of the transfer, the taxpayer treated the distribution from the CFC as a dividend qualifying for the dividends-received deduction, and Common Parent did not include any amount in income under Section 951.

Although the Service acknowledged that the courts have not addressed the facts at issue in the CCA, it drew analogies from cases where the courts have rejected similar schemes to avoid Section 951inclusions. The IRS cited several cases in which taxpayers attempted to avoid Section 951inclusions by transferring nominal voting power to "friendly" foreign persons and then arguing the foreign corporation did not meet the definition of a CFC. The courts rejected these transfers because it was clear that the U.S. shareholders continued to control the voting power of the stock nominally held by foreign persons. In reaching these conclusions, the courts concluded that mere technical compliance with the statute was not sufficient, and that the rules in the statute would be applied to the substance of the transaction rather than the form. 12

In CCA 201320014, the IRS noted, Common Parent's Section 951inclusion would have been calculated based on 100% of the CFC's Subpart F income if it owned the CFC directly for the entire year. The same result would occur if the partnership owned the CFC for the entire year. In either scenario, Common Parent would not have been eligible for the dividends-received deduction with respect to its Section 951inclusion.

Comments

While the results of CCA 201320014are not surprising, the Service's analysis is interesting for several reasons. First, the IRS went through a detailed analysis of the intent of the relevant statutes in order to determine whether common law doctrines, such as business purpose and step transaction, could be applied to challenge the transaction at issue.

Second, the IRS appears to have ignored the existence of the partnership as a purchaser of the shares of the CFC because the taxpayer and its affiliates continued to control such partnership after the acquisition. The Service may have had a stronger argument that the CFC continued to generate Subpart F income after the sale and that such income simply passed through to the taxpayer under Subchapter K (which would have defeated the purpose of the transaction). In the alternative, the Service could have applied the aggregate theory of partnership taxation (rather than the entity theory) to cause the taxpayer to be treated as a direct owner of the shares of the CFC after the sale. 13

Query whether the Service would have continued to challenge the transaction had the facts of CCA 201320014relating to the CFC been slightly different. For example, would the transaction have been challenged by the IRS if the shares in the CFC actually had been sold to an unrelated U.S. third party, rather than a related U.S. partnership? Would the Service have challenged the transaction if, instead of transferring the shares of the CFC to a related partnership, the taxpayer simply had not owned the shares in the CFC for an uninterrupted period of 30 days or more during any tax year? In both situations, the taxpayer would not be required to include in its gross income its pro rata share of the CFC's Subpart F income. 14

Finally, it also is interesting that the Service's main contention in the CCA was that the taxpayer routed the customer funds through the CFC and the RIC as a means of converting what otherwise would have been taxable interest income into dividend income eligible for the dividends-received deduction. Since 2006, however, the IRS has issued literally dozens of private letter rulings specifically allowing a RIC to establish a CFC for the sole purpose of converting nonqualifying income under Section 851(b)(2)into qualifying income for purposes of this provision. 15While in 2012 the IRS suspended issuing additional rulings related to RIC investments in commodities, it would seem that similar arguments could be made (e.g., business purpose, step transaction) to disallow the benefits sought by the taxpayers in those rulings as the IRS made in the CCA. 16

Conclusion

By disregarding the plain meaning of the statutes and looking to their intent, the IRS demonstrated that it will continue to challenge highly structured transactions undertaken with a principal purpose of generating a tax benefit, in this case a dividends-received deduction.

Practice Notes

While a transaction structured similarly to the one in the CCA may be challenged by the IRS in any event, a taxpayer that is considering utilizing a similar strategy should at least ensure that either the shares in the CFC are sold to an unrelated third party before the last day of the tax year or that the CFC is not owned for an interrupted period of 30 or more days during a tax year. This would give the taxpayer a stronger position on the Subpart F issue. Taxpayers also should take some comfort from the fact that the IRS has issued dozens of private letter rulings specifically allowing a RIC to set up a CFC for the sole purpose of converting nonqualifying income under Section 851(b)(2)into qualifying income under this provision.

Footnotes

1. Section 245(a)(3).

2. Sections 243(d)and 854(b).

3. Section 854(b).

4 Section 852(b)(2)(D).

5. Section 957.

6.   Nevertheless, the selling shareholder may be required to include a portion of the CFC's earnings in its income as a result of Section 1248.

7. Sections 871(a)and (b).

8. Court Holding Co., 33 AFTR 593, 324 US 331, 89 L Ed 981, 1945 CB 58 (1945).

9. Frank Lyon Co., 41 AFTR 2d 78-1142, 435 US 561, 55 L Ed 2d 550, 1978-1 CB 46 (1978).

10. The Section 954(b)(3)de minimis exception, the Section 954(b)(4)high-tax exception, and the Section 954(c)(3)related-party interest exception would not be applicable in this situation. See Sections 881(e)(1)(C)and 881(c)(5)(A).

11. Penrod, 88 TC 1415(1987).

12. See, e.g., Garlock Inc., 58 TC 423(1972), aff'd 33 AFTR 2d 74-395, 489 F2d 197 (CA-2, 1973); Koehring Co., 42 AFTR 2d 78-5540, 583 F2d 313 (CA-7, 1978); Estate of Weiskopf, 64 TC 78(1975), aff'd per cur. 37 AFTR 2d 76-1427, 538 F2d 317 (CA-2, 1976); Kraus, 59 TC 681(1973), aff'd 33 AFTR 2d 74-479, 490 F2d 898 (CA-2, 1974).

13. See FSA 200026009(IRS applied aggregate theory of partnership taxation in the context of a Section 245dividends-received deduction).

14. Section 951(a)(1).

15. See, e.g., Ltr. Ruls. 201206015, 201134014, and 201132008. In these rulings, the RIC established the CFC for the sole purpose of investing in commodity-related assets indirectly because a direct investment in those assets would produce nonqualifying income for the RIC that would disqualify the entity from being eligible for RIC treatment. Prior to issuing these rulings, the Service's policy called for a very limited definition of "securities" and did not permit commodity investment in any form by mutual funds. See Rev. Rul. 2006-1, 2006-1 CB 261 (in which IRS ruled that a swap contract where the reference obligation was a commodity index was not a security for purposes of Section 851(b)(2), and that income from such a swap contract was not qualifying income for purposes of that section because the income from the contract was not derived with respect to the RIC's business of investing in stocks, securities, or currencies). But see Rev. Rul. 2006-31, 2006-1 CB 1133 (the IRS stated that Rev. Rul. 2006-1"was not intended to preclude a conclusion that income from certain instruments (such as certain structured notes) that create a commodity exposure for the holder is qualifying income under section 851(b)(2)").

16. The Service's decision to suspend its issuance of these letter rulings reflects a reassessment of its ruling practice in this area in light of certain recent events, including the Commodity Futures Trading Commission's (CFTC) examination of whether RICs using commodities subsidiaries should be required to register with the CFTC as "commodity pool operators," the enactment of the RIC Modernization Act of 2010 (P.L. 111-325, 12/22/10), and an increase in the number of these ruling requests. It is unclear how much of a role pressure from the CFTC had in the Service's decision.

JEFFREY L. RUBINGER is a partner, and NADIA E. KRULER is an associate, in the Miami law firm of Bilzin Sumberg Baena Price & Axelrod LLP. Both have previously written for The Journal. Copyright © 2013, Jeffrey L. Rubinger and Nadia E. Kruler.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions