The IRS ruled in a private letter ruling (PLR 201504004) released Jan. 23 that certain interests in a partnership and disregarded entity would be considered obligations "in registered form" under Treas. Reg. Sec. 5f.103-1(c).
In the PLR, a partnership (Master Fund) was owned by two partnerships, GP and US Feeder, and a corporation, Foreign Feeder. GP served as the general partner of Master Fund. US Feeder purchased its interest in Master Fund with money that it raised from U.S. persons, and Foreign Feeder purchased its interest in Master Fund from money that it raised from foreign persons. GP also had acquired an interest in both US Feeder and Foreign Feeder either directly or indirectly.
Master Fund used the amounts it received as capital contributions from US Feeder and Foreign Feeder to acquire beneficial interests in commercial mortgage loans, which it anticipated needed modifications in order for the mortgagors to make regular payments on their respective loans. The commercial mortgages were not "in registered form" within the meaning of Treas. Reg. Sec. 5f.103-1(c); however, the right to receive distributions of principal and interest on the assets held by Master Fund would meet the requirements of "in registered form" under Treas. Reg. Sec. 5f.103-1(c)(2).
Master Fund proposed to contribute the commercial mortgages to a trust, which was a disregarded entity for U.S. federal income tax purposes. Similar to an interest in Master Fund, an interest in the trust could be transferred only related to procedures described as "in registered form" under Treas. Reg. Sec. 5f.103-1(c).
Under Sections 871 and 881, interest must be paid on an obligation that is in registered form to qualify as portfolio interest.
A pass-through or a participation certificate evidencing an interest in a pool of mortgage loans (a pass-through certificate), which is treated as a grantor trust (or similar evidence of interest in a similar pooled fund), is considered to be an obligation in registered form if the pass-through certificate is in registered form without regard to an obligation held by the fund or trust to which the pass-through certificate relates under Treas. Reg. Sec. 1.163-5T(d)(1).
Neither the Master Fund nor the trust was treated as a grantor trust under Treas. Reg. Sec. 301.7701-4(c)(1). However, the IRS ruled that interests in the Master Fund and the trust were considered obligations in registered form if the requirements in Treas. Reg. Sec. 5f.103-1(c) were satisfied because each was "similar evidences of interest in a similar pooled fund" within the meaning of Treas. Reg. Sec. 1.163-5T(d)(1).
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