Insights & News

Tax Insights, June 24, 2015
Tracking Tax News You Need to Know

June 24, 2015

IRS Rules on Income From CPI Swaps as RIC Qualifying Income
The IRS ruled, in Private Letter Ruling 201524020, that the income of three funds from swaps, the payouts of which reference the consumer price index(“CPI”), is “other income” derived from their respective businesses of investing in stock and securities under Section 851(b)(2) (section references are to the Internal Revenue Code of 1986, as amended) for purposes of qualifying as a regulated investment company. Each fund has an investment objective that includes an inflation hedge overlay, the purpose of which is to preserve the purchasing power of invested principal. To achieve that objective, the funds intend to enter into swaps, the payouts of which reference components of the CPI. The funds represented that the notional amount of the swaps will not exceed an amount reasonably calculated to reduce a fund’s level of inflation risk with respect to its investment in the fund’s hedged securities. The funds also represented that they will implement their inflation hedge strategy at the portfolio level by seeking to enter into the swaps substantially contemporaneously with the acquisition of portfolio securities. Each fund’s books and records provide the date of each acquisition of a security and the substantially contemporaneous date on which a fund entered into the related swap. Finally, the funds represented that they will continue to monitor the hedge strategy to make adjustments to the swaps to take into account changes with respect to the portfolio of hedged securities. In comparison to prior CPI swap rulings, the representations in this ruling appear to require a closer connection between the CPI swaps used to hedge inflation and the corresponding portfolio securities.

Safe Harbor for Allocation of Section 48 Energy Production Tax Credits Inapplicable to Section 45 Energy Production Tax Credits
The IRS found, in Chief Counsel Advice 201524024, that an energy credit partnership could not rely on a safe harbor intended for partners and partnerships with Section 45 wind energy production tax credits to support the allocation of tax credits under Section 48 among its members. The limited liability company (taxed as a partnership) entered into transactions designed to generate Section 48 energy credits with respect to solar energy property. The Chief Counsel Advice concludes that the safe harbor is limited to partners and partnerships with Section 45 wind energy production tax credits, and that even if the safe harbor could apply, the limited liability company failed to satisfy the requirements of the safe harbor.

IRS Rules on Patronage Dividends Paid to REIT
The IRS ruled, in Private Letter Ruling 201524017, that patronage dividends included in a real estate investment trust’s gross income under Section 1385 were excluded from its gross income for purposes of Section 856(c)(2) and (c)(3). The REIT is a timberlands company.

Texas Legislation Reduces Franchise Tax Rates
Texas Governor Greg Abbott signed the Franchise Tax Reduction Act of 2015 on June 15, 2015. The Act reduces the state’s franchise tax by 25% for reports originally due on or after January 1, 2016.

FATCA Agreement With United Arab Emirates Now Available
The FATCA agreement between the United States and the United Arab Emirates is now available.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest.

Copyright © 2015 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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