IRS written determination 201430017

Private letter rulings and published taxpayer determination letters. Native document type is retained separately; a determination letter is not labeled a private letter ruling. These taxpayer-specific releases cannot be used or cited as precedent under 26 USC 6110(k)(3); applicability and current legal force are not independently certified. Keep repeated UILC subjects attached to one actual numbered document.

TAX EXEMPT AND
GOVERNMENT ENTITIES
DIVISION
Number: 201430017
Release Date: 7/25/2014
Date: May
2, 2014
DEPARTMENT OF THE TREASURY
INTERNAL REVENUE SERVICE
WASHINGTON, D.C. 20224
Contact Person:
Identification Number:
Telephone Number:
Employer Identification Number:
UIL: 512.00-00; 512.01-00; 514.00-00; 4943.00-00
4943.04-03; 4944.00-00
Legend:
Foreign Country
=
Dear
We have considered your ruling request dated October
7, 2013, requesting rulings under
Internal Revenue Code (I.R.C.) §§ 512, 514,4943, and 4944.
FACTS
You are a tax-exempt organization recognized under§ 501 (c)(3) and classified as a private,
non-operating foundation
under§ 509(a). Your mission is to provide substantial, widespread,
and lasting changes to society that will maximize opportunity and minimize injustice.
You intend to form a corporation
in Foreign Country (Corporation) for the purpose of facilitating
and managing your foreign investing, which will include distressed-debt investing. Working
closely with your investment advisors, your managers determined that your foreign investments
can be better managed, result
in a more tax-efficient structure, and enhance your ability to fulfill
your charitable mission by using the Corporation. Additionally, you desire to make your foreign
investments through the Corporation for asset management and liability protection purposes.
You will capitalize the Corporation with cash and non-encumbered property; you state that you
will not borrow funds or otherwise incur debt to finance the Corporation.
In exchange, you will
own 1 00 percent
of the Corporation's stock. The Corporation will be treated as a corporation for
U.S. income tax purposes.
You represent the following:
• At least 95 percent
of the Corporation's income will be from passive investments, such
as interest income from loans, within the meaning
of§ 4943(d)(3)(B) and within the

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definition of foreign personal holding company income under§ 954(c)(1 )(A) from foreign
sources.
• The Corporation will not receive income attributable to insurance income.
• As a general proposition, the Corporation will hold investments that, if you owned them,
would be debt-financed and therefore would generate unrelated business taxable
income.
• The Corporation's investments, when combined with your investments and the
investments of your disqualified persons, will not exceed a 35 percent voting interest
in a
business enterprise where effective control can be demonstrated to be with non-
disqualified persons and will not exceed a 20 percent voting interest
in a business entity
otherwise.
RULINGS REQUESTED
1. The Subpart F income includable in your income with respect to the Corporation will not
be subject to the unrelated business income tax
under§§ 512 and 514.
2. Your ownership of the Corporation does not result in an excess business holding under
§ 4943(c).
3. Your ownership of the Corporation is not a jeopardizing investment under§ 4944.
LAW
I.R.C. § 511 (a)(1) imposes a tax on the unrelated business taxable income (UBTI) (as defined
by§ 512) of certain exempt organizations, including § 501 (c)(3) organizations.
I.R.C. § 512(b)(1) provides that there shall
be excluded from the calculation of UBTI all
dividends, interest, payments with respect to securities loans (as defined
in subsection (a)(5)),
amounts received or accrued as consideration for entering into agreements to make loans, and
annuities, and all deductions directly connected with such income.
I.R.C. § 512(b)(4) provides that, notwithstanding the general exclusion of dividends from UBTI,
dividends and other passive investment income derived from certain debt-financed property
(and corresponding deductions) are included,
as an item of gross income derived from an
unrelated trade
or business, in an amount ascertained under§ 514.
I.R.C. § 512(b)(17), added by the Small Business Job Protection Act
of 1996, provides that any
amount included
in gross income under§ 951 (a)(1 )(A) shall be included as an item of gross
income derived from an unrelated trade or business to the extent that the amount so included
is
attributable to insurance income as defined in § 953.
I.R.C. § 953 defines "insurance income,"
in part, as income which is attributable to the issuing of
an insurance or annuity contract.
I.R.C. §§ 951 through 964 comprise Subpart F --Controlled Foreign Corporations. Section

3
951(a)(1)(A) provides that a United States shareholder of a controlled foreign corporation must
include
in gross income his pro rata share of the controlled foreign corporation's Subpart F
income for the year, even if not distributed. Section 954(c)(1) of the Code provides that Subpart
F income
includes investment income.
I.R.C. § 514 provides that the term "unrelated business income" includes "unrelated debt-
financed income" from investment property. The investment income
included is proportionate to
the debt on the property.
I.R.C. § 4943(a) imposes a tax on the excess business holdings of any private foundation
in a
business enterprise during any taxable year
in which ends during the taxable period.
I.R.C. § 4943(c)(1) provides that the term "excess business holdings" means, with respect to the
holdings of any private foundation
in any business enterprise, the amount of stock or other
interest
in the enterprise which the foundation would have to dispose of to a person other than a
disqualified person
in order for the remaining holdings of the foundation in such enterprise to be
permitted holdings.
I.R.C. §4943(c)(2) provides that the permitted holdings of any private foundation
in an
incorporated business enterprise are-
(i) 20 percent of the voting stock, reduced by
(ii) The percentage of the voting stock owned by
all disqualified persons.
In any case
in which all disqualified persons together do not own more than 20 percent of the
voting stock of an incorporated business enterprise, nonvoting stock held by the private
foundation
shall also be treated as permitted holdings.
I.R.C.
§ 4943(d)(3)(B) provides that the term "business enterprise" does not include a trade or
business at least 95 percent of the gross income of which
is derived from passive sources,
which includes items excluded
by§ 512(b)(1), (2), (3), and (5).
Treas.
Reg.§ 53.4943-10(a)(1) provides that, except as provided in paragraph (b) or (c) of this
section
under§ 4943(d)(4), the term "business enterprise" includes the active conduct of a trade
or business,
including any activity which
is regularly carried on for the production of income from
the sale of goods or the performance of services and which constitutes an unrelated trade or
business under§ 513. For purposes of the preceding sentence, where an activity carried on for
profit constitutes an unrelated trade or business, no part of such trade or business shall be
excluded from the classification of a business enterprise merely because it does not result
in a
profit.
Treas.
Reg.§ 53.4943-10(c)(1) provides that, for purposes of§ 4943(d)(4), the term "business
enterprise" does not
include a trade or business at least 95 percent of the gross income of
which is derived from passive sources; except that if in the taxable year in question less than 95
percent of the income of a trade or business is from passive sources, the foundation may, in
applying this 95 percent test, substitute for the passive source gross income in such taxable

4
year the average gross income from passive sources for the 10 taxable years immediately
preceding the
taxable year
in question (or for such shorter period as the entity has been in
existence). Thus, stock in a passive holding company is not to be considered a holding in a
business enterprise even if the company
is controlled by the foundation. Instead, the foundation
is treated as owning its proportionate share of any interests
in a business enterprise held by
such company
under§ 4943(d)(1).
Treas.
Reg.§ 53.4943-10(c)(2) provides that gross income from passive sources, for purposes
of this paragraph,
includes the items excluded by § 512(b)(1) (relating to dividends, interest, and
annuities), 512(b)(2) (relating to royalties), 512(b)(3) (relating to rent) and 512(b)(5) (relating to
gains or losses from the disposition of certain property). Any income classified as passive under
this paragraph does not lose its character merely
because§ 512(b)(4) or 514 (relating to
unrelated debt-financed income) applies to such income.
I.R.C. § 4944(a) imposes a tax if a private foundation invests any amount in such a manner as
to jeopardize the carrying out of any of its exempt purposes.
Treas. Reg. § 53.4944-1 (a)(2)(i) provides that, except as provided
in§§ 4944(c), § 53.4944-3, §
53.4944-6(a), and subdivision (ii) of this subparagraph, an investment shall be considered to
jeopardize the carrying out of the exempt purposes of a private foundation
if it is determined that
the foundation managers, in making such investment, have failed to exercise ordinary business
care and prudence, under the facts and circumstances prevailing at the time of making the
investment,
in providing for the long-and short-term financial needs of the foundation to carry
out its exempt purposes.
In the exercise of the requisite standard of care and prudence the
foundation managers may take into account the expected return (including both income and
appreciation of capital), the risks of rising and falling price levels, and the need for diversification
within the investment
portfolio (for example, with respect to type of security, type of industry,
maturity of company, degree of risk and
potential for return). The determination whether the
investment of a particular amount jeopardizes the carrying out of the exempt purposes
of a
foundation shall be made on an investment by investment basis, in each case taking into
account the foundation's portfolio as a whole. No category of investments shall be treated as a
per se
violation of§ 4944. However, the following are examples of types or methods of
investment which
will be closely scrutinized to determine whether the foundation managers
have met the requisite standard of care and prudence: Trading
in securities on margin, trading
in commodity futures, investments in working interests in oil and gas wells, the purchase of
"puts," "calls," and "straddles," the purchase of warrants, and selling short. The determination
whether the investment of any amount jeopardizes the carrying out of a foundation's exempt
purposes is to be made as of the time that the foundation makes the investment and not
subsequently on the basis of hindsight. Therefore, once it has been ascertained that an
investment does not jeopardize the carrying out of a foundation's exempt purposes, the
investment shall never
be considered to jeopardize the carrying out of such purposes, even
though, as a
result of such investment, the foundation subsequently realizes a loss. The
provisions
of§ 4944 and the regulations thereunder shall not exempt or relieve any person from
compliance with any Federal or State law imposing any obligation, duty, responsibility, or other
standard of conduct with respect to the operation or administration of
an organization or trust to
which § 4944
applies. Nor shall any State law exempt or relieve any person from any obligation,

5
duty, responsibility, or other standard of conduct provided in§ 4944 and the regulations
thereunder.
ANALYSIS
1. Unrelated Business Taxable Income
The Subpart F income includable in your income with respect to the Corporation will not be
subject to the unrelated business income tax
under§§ 512 and 514. Section 511(a)(1) imposes
a tax on the unrelated business taxable income (UBTI) of certain exempt organizations. Section
512(b)(1) generally excludes from the calculation of UBTI income from dividends, interest, and
annuities. Here, you characterize the income you will receive from the Corporation as "Subpart
F income" from a controlled foreign corporation. Subpart F income generally includes
"insurance income" defined
in § 953. However, you state that none of the income you receive
from the Corporation
will be attributable to
insurance income, which
would be included in
calculating UBTI under§ 512(c)(17). Furthermore, you state that the Corporation will derive at
least 95 percent of its income for passive investments within the meaning
of§ 954(c)(1 )(A),
which defines
"personal holding company income" as the portion of gross income which
consists of dividends, interest,
royalties, rents, and annuities. Accordingly, income received
from the Corporation
will be dividend income and therefore will be excluded from the
computation of UBTI
under§ 512(b)(1).
Nonetheless,§§ 512(b)(4) and 514 require,
in the case of debt-financed property, the inclusion
of an amount proportionate to the debt on the property
in the calculation of UBTI. You state that
the Corporation will hold investments that, if you owned them directly, would be debt-financed
and therefore
would generate UBTI. However, you state that you will receive this income
indirectly from the Corporation
in the form of dividends, which are not taxable under§ 512(b)(1).
Additionally, you state that you will not borrow funds or otherwise incur debt
in financing your
investment
in the Corporation. Accordingly, the dividends received from the Corporation are not
debt-financed income described
in§ 514.
2. Excess Business Holding
Your ownership of the Corporation's stock does not result in an excess business holding within
the
meaning§ 4943. Section 4943(a) imposes a tax on the excess business holdings of any
private foundation in a business enterprise. Section 4943(c)(2)(A) provides that a private
foundation may
hold 20 percent of the voting stock, reduced by the percentage of voting stock
owned by all disqualified persons, of an incorporated business enterprise. Any amount of stock
or other interest
in the enterprise held in excess of this amount is an excess business holding
under§ 4943(c)(1).
You hold 100 percent of the Corporation's stock. Accordingly, your holding of the Corporation's
stock is an excess benefit
holding if the Corporation is a "business enterprise" within the
meaning of Treas.
Reg.§ 53.4943-10(a), which defines "business enterprise" as including the
active conduct of a trade
or business, including any activity which is regularly carried on for the
production of income from the
sale of goods or the performance of services and which includes

6
an unrelated trade or business under§ 513. Nonetheless, § 4943(d)(3)(B) provides that the
term "business
enterprise" does not include a trade or business at least 95 percent
of the gross
income
of which is derived from passive sources, including items excluded by§ 512(b)(1)
(dividends, interest, and annuities), (2) (royalties), (3) (certain rents), and (5) (gains
or losses
from the disposition
of certain property). Treas. Reg.§ 53.4943-10(c)(1) & (2). Accordingly, the
Corporation is not a "business enterprise" because you represent that at least 95 percent
of the
Corporation's gross income will be derived from passive sources within the meaning
of §
4943(d)(3)(B). The passive character
of the Corporation's investments is not changed even
though some
of those investments would result in debt-financed income if held by you. Treas.
Reg.§ 53.4943-10(c)(2). Nonetheless, this ruling does not address whether the Corporation's
underlying investments may result
in excess business holdings. See Treas. Reg. § 53.4943-
10(c)(1) (regarding passive holding companies).
3. Jeopardizing Investment
Your ownership of the Corporation is not a jeopardizing investment under § 4944. Section
4944(a) imposes a tax if a private foundation invests any amount
in such a manner as to
jeopardize the carrying out
of any of its exempt purposes. An investment is a jeopardizing
investment if the foundation managers,
in making such investment, failed to exercise ordinary
business care and prudence
in providing for the long-and short-term financial needs of the
foundation to carry out its exempt purposes. Treas. Reg. § 53.4944-1 (a)(2)(i). No one category
of investments is a per se jeopardizing investment. .!Q,_ However, certain investments will be
scrutinized more closely, such as trading
in securities on margin, trading in commodity futures,
investments
in working interests in oil and gas wells, the purchase of "puts," "calls," and
"straddles," the purchase
of warrants, and selling short . .!Q,_
Your foundation managers exercised ordinary business care and prudence in deciding to make
your foreign investments through the Corporation. First, you state that your managers
determined that your foreign investments can be better managed, result in a more tax-efficient
structure, and enhance your
ability to fulfill its charitable mission by using the Corporation.
Second, you state that you worked closely with your investment advisors
in making this
determination. Additionally, the Corporation's stock is not one
of the scrutinized investments
listed in Treas. Reg. § 53.4944-1 (a)(2)(i).
CONCLUSION
Based on the foregoing, we rule as follows:
1. The Subpart F income includable in your income with respect to the Corporation will not
be subject to the unrelated business income tax
under§§ 512 and 514.
2. Your ownership of the Corporation does not result in an excess business holding under
§ 4943(c).
3. Your ownership of the Corporation is not a jeopardizing investment under§ 4944.

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This ruling is based on the representation that at least 95 percent of the Corporation's income
will be from passive investments. See Treas.
Reg.§ 53.4943-10(c).
This ruling will be made available for public inspection under section 6110 of the Code after
certain deletions of identifying information are made. For details, see enclosed Notice 437,
Notice
of Intention to Disclose. A copy of this ruling with deletions that we intend to make
available for public inspection is attached to Notice 437. If you disagree with our proposed
deletions, you should follow the instructions
in Notice 437.
This
ruling is directed only to the organization that requested
it. Section 6110(k)(3) of the Code
provides that it may not
be used or cited by others as precedent.
This
ruling is based on the facts as they were presented and
on the understanding that there will
be no material changes
in these facts. This ruling does not address the applicability of any
section of the Code or
regulations to the facts submitted other than with respect to the sections
described. Because it could help resolve questions concerning your federal income tax status,
this ruling should be kept
in your permanent records.
If you have any questions about this ruling, please contact the person whose name and
telephone number are shown
in the heading of this letter.
In accordance with the Power of Attorney currently on file with the Internal Revenue Service, we
are sending a copy of this
letter to your authorized representative.
Enclosure
Notice 437
Sincerely,
Michael Seto
Manager, EO Technical