Sovereign wealth funds (SWFs) are governmental

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1 Anti-Deferral and Anti-Tax Avoidance By Peter A. Glicklich and Candice M. Turner Sovereign Wealth Funds at a Disadvantage Compared to U.S. Tax-Exempts Sovereign wealth funds (SWFs) are governmental investment vehicles, often funded with foreign exchange assets, and managed separately from the official reserves of a monetary authority. 1 They have recently attracted the attention of Congress and the imagination of the public press. 2 This attraction may be the result of several factors, including an increase in commodity prices, growth in the size and public nature of SWF investments, and the recent U.S. credit crunch. In any event, Senators Baucus and Grassley of the Committee on Finance have requested the Joint Committee on Taxation [to] describe and [to] analyze the history, current rules, and policy underpinnings of the U.S. tax rules applicable to U.S. investment by foreign governments, including investments made by Sovereign Wealth Funds. 3 They indicated that we ought to have a clear understanding of the U.S. tax rules that apply to these investments, how those rules compare to those that apply to non-governmental foreign investors, and how other countries tax these investments. 4 Given the economic and political climate confronting SWFs today, it may be time for the United States to consider harmonizing the foreign governmental exemption found in Code Sec and the U.S. treatment of tax-exempts under the unrelated business income tax (UBIT). 6 Peter A. Glicklich and Candice M. Turner are Partners in the New York office of Davies Ward Phillips & Vineberg LLP. Foreign Governmental Exemption in Code Sec. 892 The governmental exemption, based upon comity and concepts of sovereign immunity, first appeared INTERNATIONAL TAX JOURNAL 5

2 Anti-Deferral and Anti-Tax Avoidance in U.S. tax legislation in 1917, and covered only certain investment income. Code Sec. 892(a)(1) still contains only a limited exemption for certain investment income earned by foreign governments. Code Sec. 892 was significantly narrowed in by the Tax Reform Act of 1986 ( TRA ); temporary regulations published in 1988, 7 with minor exceptions, remain effective today. 8 What Is a Foreign Government? For purposes of the Code Sec. 892 exemption, a foreign government is defined in Temporary Reg T by exclusion, and includes only integral parts and controlled entities of a foreign sovereign. 9 An integral part of a foreign sovereign is any person or bodies of persons, organization, agency, bureau, fund, instrumentality or other body, however designated, that constitutes a governing authority of a foreign country. 10 An individual sovereign, official or administrator acting in his or her private or personal capacity, determined under a facts and circumstances analysis, is not an integral part of a foreign sovereign. 11 Controlled entity is defined as an entity that is separate in form from a foreign sovereign or otherwise constitutes a separate juridical entity, provided that it meets four additional criteria: (1) it is wholly owned and controlled by a foreign sovereign (directly or indirectly through one or more other controlled entities); (2) it is organized under the laws of the foreign sovereign by which it is owned; (3) its net earnings are credited to its own account or to other accounts of the foreign sovereign, with no part of its earnings inuring to the benefit of any private person); and (4) its assets vest in the foreign sovereign upon dissolution. 12 A controlled entity does not include partnerships or any other entity owned and controlled by more than one foreign sovereign. A separately organized pension trust also qualifies as a controlled entity if it satisfies the following conditions: (1) the trust is established exclusively for the benefit of employees or former employees of a foreign government or nongovernmental employees or former employees that perform or performed governmental or social services; (2) the funds comprising the trust are managed by trustees who are employees of, or persons appointed by, the foreign government; (3) the trust forming a part of the pension plan provides for retirement, disability or death benefits in consideration for prior services rendered; and (4) income of the trust satisfies the obligations of the foreign government to participants under the plan, rather than inuring to the benefit of a private person. 13 What Income Is Exempt? Generally. The Code Sec. 892 exemption covers only enumerated items, including income from (1) investments in stocks, bonds and other securities, (2) financial instruments held in the execution of governmental financial or monetary policy, and (3) bank deposits. 14 Income derived from any other sources is not exempt. 15 The term other securities includes any evidence of indebtedness, thereby extending the exemption to all interest income, possibly excepting interest on open account indebtedness not evidenced in writing. 16 Income from a financial instrument is exempt under this rule only if implementation of governmental financial or monetary policy is the primary purpose for holding the instrument. 17 The term financial instruments includes forward, futures and option contracts in any currency and currency swap agreements, but not currency itself unless it is held by a foreign central bank of issue. 18 The exemption also covers gains on sales of stocks, bonds or other securities, and income under agreements to loan securities to brokers for use in short sales, but explicitly does not cover gain from the sale of partnership or trust interests. 19 Gains from the disposition of an interest in a controlled commercial entity (CCE), described below, are not exempt, nor are any income received by or from a CCE. Exclusion for Commercial Activities. Most importantly, Code Sec. 892 excludes income from commercial activities conducted anywhere in the world. Unlike the approach in the pre-tra regulations, the temporary Treasury regulations do not use the trade or business standard of Code Sec. 864(b) for determining commercial activity. Rather, commercial activity includes any activity, unless otherwise excepted, which [is] ordinarily conducted by the taxpayer or by other persons with a view towards the current or future production of income or gain. 20 The temporary treasury regulations specify several activities that do not constitute commercial activities: investments in stocks, bonds and other securities, regardless of the volume of trading (unless undertaken as a dealer); commodities trading (regardless of whether such activities constitute a trade or business for purposes of Code Sec. 864(b)); loans (unless made by a banking, financing or similar business); CCH. All Rights Reserved

3 investments in financial instruments held in the execution of governmental financial or monetary policy; holding net leases on real property (or land that is not producing income); and holding bank deposits. Similarly, trading for a taxpayer s own account is not a commercial activity, although investments made by a banking, financial or similar business are considered to be commercial activities, even if the income would not be effectively connected to the business. 21 No direct guidance exists as to the deductions that are available to reduce gross income from a commercial activity. Controlled Commercial Entities (CCEs). As noted above, income received by or from a CCE is not exempt from tax under Code Sec The term controlled commercial entity is defined in the Code to mean any entity engaged in commercial activities (whether inside or outside the United States) if the foreign government either (1) holds (directly or indirectly) any interest in such entity which, by value or voting interest, is fifty percent or more of the total of such interests in such entity; or (2) holds (directly or indirectly) any other interest in such entity which provides the foreign government with effective control of such entity. 22 In an unfortunate use of terminology, the threshold for control of a CCE under the Code can be much less than needed to be an exempt controlled entity under the temporary regulations. Under the Code, an entity engaged in commercial activities will be treated as a CCE if a foreign government also holds sufficient interests in the entity, even less than 50 percent of the stock, to give it effective control over the entity. The temporary treasury regulations use the expanded standard of effective practical control (emphasis added) instead, and provide that a foreign government can have such control even where the foreign government holds only a The temporary treasury regulations specify several activities that do not constitute commercial activities: investments in stocks, bonds and other securities, regardless of the volume of trading (unless undertaken as a dealer); commodities trading (regardless of whether such activities constitute a trade or business for purposes of Code Sec. 864(b)); loans (unless made by a banking, financing, or similar business); investments in financial instruments held in the execution of governmental financial or monetary policy; holding net leases on real property (or land which is not producing income); and holding bank deposits. minority interest which is sufficiently large to achieve effective control, or through creditor, contractual or regulatory relationships which, together with ownership interests held by the foreign government, achieve effective control. 23 Temporary Reg T(d)(2) requires tracing nonexempt income received from a CCE. For example, dividends received by a controlled entity (non-cce) parent from a subsidiary CCE are not exempt in the hands of the parent; but the mere receipt of the dividend does not taint the parent as being engaged in a commercial entity. Yet, the (non-exempt) dividend continues to be traced further upstream. In particular, dividends paid by the parent in this example to a grandparent controlled entity (non-cce) (or, to the ultimate foreign sovereign) are also not considered exempt under Code Sec. 892, because they are considered as having been paid traced to the CCE. As suggested in the preceding paragraph, commercial activities of a subsidiary CCE are not attributed to its parent corporation (and thus do not taint the parent as a CCE). Commercial activities of one CCE are not attributed to a brother or sister corporation that is commonly controlled either. Other than in the case of publicly traded partnerships, however, commercial activities of a partnership will taint any partner controlled entities as CCEs. Similarly, under the temporary regulations taint also can spread downstream from a CCE to any lower tier controlled entity. 24 Coordination with FIRPTA Gain from the sale of stock of a noncontrolled corporation by a foreign government generally is exempt from tax under Code Sec The exemption for income from the sale of corporate shares applies even where the shares constitute stock in a U.S. real property holding corporation (USRPHC). Stock of a INTERNATIONAL TAX JOURNAL 7

4 Anti-Deferral and Anti-Tax Avoidance USRPHC is generally treated as a United States real property interest (USRPI) gain from which is otherwise taxable to foreign investors under Code Sec. 897(a). 26 The governmental exemption does not apply, however, to gain from the disposition of a direct interest in U.S. real estate. 27 In other words, the Code Sec. 892 temporary regulations draw a distinction between gain from the disposition of USRPIs that comprise direct interests in real property described in Code Sec. 897(c)(1)(A)(i), which are taxable under Code Sec. 892, and gain from the disposition of USRPIs that comprise stock in a USRPHC described in Code Sec. 897(c)(1)(A)(ii), which are not taxable under Code Sec Temporary Reg T(b) (1) provides that a USRPHC or foreign corporation that would have been a USRPHC if it were a U.S. corporation, and that meets the ownership test for a CCE, will be deemed to be a CCE. An interesting issue arises with respect to certain distributions from real estate investment trusts (REITs). Code Sec. 897(h)(1) treats any distribution from a noncontrolled REIT to a foreign corporation or other REIT that is attributable to gain from the sale or exchange of a USRPI as gain from the sale or exchange of a USRPI, effectively characterizing the amount distributed as being subject to FIRPTA following a taxable form of disposition of USRPIs by the REIT. 28 Historically, many U.S. tax practitioners took the view that Code Sec. 892 exempted the distributions from a REIT as a dividend. This view was supported by the plain language of Code Sec. 892 and the temporary regulations which exempt from U.S. tax, income of a foreign government from an investment in stock (other than stock of a CCE). 29 Similarly, practitioners historically did not consider Code Sec. 897(h)(1) to apply to a liquidating distribution from a noncontrolled REIT. Under Code Sec. 331, a shareholder recognized gain on a sale of stock, and that treatment was generally viewed to override the recharacterized rule in Code Sec. 897(h)(1). 30 On June 13, 2007, however, the IRS issued Notice The Notice announced how future regulations will clarify that a distribution from a REIT that is attributable to gain recognized by a noncontrolled REIT on the sale of a USRPI prior to a liquidation, does not avoid application of Code Sec. 897(h)(1) and does not qualify for any Code Sec. 892 exemption, and so will be subject to tax under FIRPTA (and to FIRPTA withholding under Code Sec. 1445). The Notice states that the IRS will challenge under current statutory and regulatory provisions an assertion that 892 exempts from taxation distributions from a [REIT] that are treated under 897(h)(1) as gain recognized by a foreign government shareholder from the sale or exchange of a USRPI described in 897(c) (1)(A)(i). The Notice is controversial and is expected to be challenged by sovereigns who planned their holdings of U.S. real property through private REITs long before issuance of the Notice. Comparing Code Sec. 892 and UBIT Rules The exemption under Code Sec. 892 is generally more limited than the exemption available to Code Sec. 501 tax-exempt organizations. 32 Those organizations include religions and educational institutions, instrumentalities of the U.S. government, pension trusts, and certain private foundations. Code Sec. 501(b), however, permits imposition of the unrelated business income tax (UBIT). 33 The purpose of UBIT was reflected in the Senate Report accompanying Code Sec. 511: the problem at which the tax on unrelated business income is directed is primarily that of unfair competition. The tax-free status of 501(c) organizations enables them to use their profits tax-free to expand operations, while their competitors can expand only with the profits remaining after taxes. 34 In this regard, the exemptions under Code Secs. 501 and 892 are similar; both allow profit-making activities relevant to the purpose for which they are given an exemption (in the case of Code Sec. 892, governmental functions) but tax income not relevant to that purpose and activities that compete with other taxable businesses. UBIT, however, is imposed on a narrower base than income that is subject to tax after applying the Code Sec. 892 exemption. UBIT is imposed on the gross income derived by any organization from the unrelated trade or business regularly carried on by it subject to deductions. 35 Initially, UBIT is limited to income from a trade or business, which is not defined in Code Sec As explained above, the governmental exemption only protects certain types of income from U.S. tax. Moreover, although the exemption exceptions in Code Sec. 892 were initially linked to income from a trade or business as defined in Code Sec. 864(b), that link was removed from the current regulations, expanding the exceptions to capture certain commercial income, whether or not from a trade or business CCH. All Rights Reserved

5 The exemption for U.S. tax-exempts generally excludes more and broader categories of income from tax. Unlike the governmental exemption, other passive income, such as royalties, is also exempt from UBIT. 36 Additionally, income from several other types of activities, which would generally be subject to tax, are also excluded from the reach of UBIT. Specifically excluded from unrelated trade or business, are businesses staffed by volunteers, sales of donated merchandise, businesses operated for the convenience of constituents, certain entertainment and recreational activities at fairs and similar events, certain activities at conventions and trade shows, bingo games, small hospitals providing services for each other, agricultural or horticultural organizations provision of benefits or privileges for their members, provisions of low cost articles in connection with solicitations of contributions, exchanging or renting mailing lists and uses of the names or acknowledgments of corporate sponsors. 37 Of particular note, real property rents are generally exempt from UBIT, regardless of whether the management of the property would be an active trade or business, provided the rents are not based upon the income or profits derived from the property. 38 Gain from the sale or disposition of real property is also generally exempt from UBIT. 39 Foreign governments, on the other hand, are obviously subject to tax under FIRPTA on any income attributable to a U.S. real property interest (other than gain from the disposition of stock of noncontrolled USRPHC), even if the income is not derived from a trade or business. 40 As in the case of the governmental exemption, income from dividends and interest and gain from the sale of stock, is generally not subject to tax under the UBIT rules either. With respect to investments in subsidiaries, the exemptions differ: Dividends and interest are eligible for exemption under Code Sec. 892 if the sovereign owns less than 50 percent of the stock of the payor by vote or value, and if the payor is not otherwise a CCE. By contrast, Code Sec. 512(b) (13) subject to UBIT only interest, royalties and rents (but not dividends) received from certain controlled entities; and for this purpose, a corporation is considered controlled only if the exempt organization Temporary Reg T(b) (1) provides that a USRPHC or foreign corporation that would have been a USRPHC if it were a U.S. corporation, and that meets the ownership test for a CCE, will be deemed to be a CCE. owns stock possessing more than 50 percent of the vote or value of all of the stock (actually or constructively, applying the rules of Code Sec. 318). Similar rules apply to payments from a partnership or other controlled entity. 41 Another important distinction between the governmental exemption and that of U.S. tax-exempts is that a controlled entity s exemption automatically terminates under Code Sec. 892 if it earns even a scintilla from a commercial activity, while a U.S. tax-exempt s exemption is not. Thus, if a controlled entity of a foreign sovereign has commercial activity anywhere in the world, it will be a CCE and will no longer be exempt from any U.S. income tax. In addition, income from that entity could be subject to tax when paid to the hands of any governmental parent, assuming it is U.S. source, effectively connected, income. With respect to U.S. tax-exempts, however, the tax imposed on unrelated business income generally has no impact on the treatment of the entity as otherwise tax-exempt. 42 The treatment of income from subsidiaries or other entities held by U.S. tax-exempts is also significantly different than the treatment of such income to foreign governments. If an exempt organization holds an interest in a passthrough entity, such as a partnership or common trust fund, the organization s share of the entity s income is treated as unrelated business income only to the same extent that it would have been if the entity s activities and assets were earned or held by the U.S. tax-exempt. 43 In contrast, commercial activities of a partnership held by a controlled entity of a foreign government are attributed to the foreign government and that attribution causes a controlled entity that is a partner to be treated as a CCE, effectively tainting all of its other income under Code Sec. 892 and possibly subjecting the sale of the partnership interest to U.S. tax. 44 As noted previously, the Code Sec. 892 rules with respect to investments in real estate are also more restrictive than under the UBIT rules. Income from leasing real property is generally considered a nonexempt commercial activity under Temporary Reg T(c) unless the real property produces INTERNATIONAL TAX JOURNAL 9

6 Anti-Deferral and Anti-Tax Avoidance income only from a net lease. Furthermore, income from sales of real property is not exempt under Code Sec Under UBIT, rental income generally is exempt from classification as an unrelated trade or business unless it is based on personal property or business profits. 46 Gains and losses from the sale of property, including real property, are generally exempt from UBIT unless it is inventory. 47 While the UBIT regime generally provides a broader exemption than Code Sec. 892, it is more restrictive in at least one respect: the exclusion for tax-exempts does not cover income from debt-financed property. 48 Generally, property is debt-financed property if it is held to produce income and acquisition indebtedness with respect to the property exists at any time during the tax year (or, in the case of a disposition, at any time during the preceding 12 months). 49 There is no similar rule under Code Sec U.S. pension plans are generally exempt from the debt-financed limitation. 50 If one or more qualified pension plans owns too much stock of a REIT, however, dividends received from the REIT are treated as income from an unrelated business to the extent that the REIT has net income from an unrelated trade or business. 51 Pursuant to Code Sec. 856(h)(3)(C), if a pension fund holds more than a 10-percent interest in any pension held REIT at any time during the year, the REIT will be treated as having for such taxable year gross income from unrelated trade or business in an amount which bears the same ratio to the aggregate dividend paid as the gross income of the REIT for the REIT year from unrelated trades or businesses, bears to the gross income of the REIT for the year. 52 A REIT is considered to be a pension-held REIT for this purpose if any pension plan holds more than 25 percent of the REIT interests or pension funds holding at least 10 percent of the REIT hold more than 50 percent of the REIT in the aggregate. However, income earned by the REIT, which would not have been UBIT if earned directly by the U.S. pension plan, is not subject to this UBIT deeming rule. Despite their divergence, the UBIT rules have some application to the governmental exemption in the area of pension funds. 53 A pension fund that is operated by and for the benefit of the employees of a foreign government, as described in Temporary Reg T(c), will not be treated as a controlled commercial entity if it solely earns income that would not be treated as UBIT under Code Sec. 512(a)(1) if the fund were a qualified trust described in Code Sec. 401(a). 54 The UBIT rules appear to have no other direct application to controlled entities other than pension funds; instead, income controlled entities will be subject to U.S. tax and not exempt under Code Sec. 892 if such controlled entities engage in commercial activity. The legislative history of Code Sec. 892 and the temporary Treasury regulations offer no rationale for the variance between UBIT and income of a foreign government from commercial activity. Conclusion The justification for the exemption from U.S. taxation of foreign sovereigns is grounded in fundamental notions of comity and sovereign immunity, which, as interpreted for over 30 years, do not extend to commercial activities, to avoid providing an unfair comparative advantage. The same rationale applies to unrelated trade or business income of an otherwise tax-exempt U.S. organization (whether religious, educational, labor, social or pension fund). Strong parallels would appear to exist between the rationale for exemption of both groups. Yet, the Code Sec. 892 exemption is generally more narrow, but in limited circumstances, more broad, than the rules applicable to the unrelated business income of U.S. tax-exempt organizations. Perhaps it is time to broaden the Code Sec. 892 exemption and harmonize it with the exemption applicable to tax-exempt organizations. In its deliberations, Congress might to be reminded of the preference for a balanced and rational approach to equating the taxation of the commercial income of both foreign governments and tax-exempt organizations, since the exemptions both carry similar potential competitive advantages (over taxable U.S. businesses). Harmonization could also improve the international competitiveness of the U.S. capital markets, assist in reducing the United States s balance of payment deficit, and improve U.S. capital import and capital export neutrality. 1 Department of Treasury, Appendix 3 Sovereign Wealth Funds, June 13, Subsequent to the draft of this article, the Joint Committee on Taxation and the New ENDNOTES York Bar Association Tax Section both issued reports on SWFs. Joint Comm. on Taxation, Economic and U.S. Income Tax Issues Raised by Sovereign Wealth Fund Investment in the United States (JCX-49-08), June 17, 2008; NY State Bar Assoc. Tax Section, Report on the Tax Exemption for Sovereigns under Section 892 of the Internal Revenue Code, CCH. All Rights Reserved

7 June 2, Their reports confirmed the analysis of this article but did not propose liberalizing Code Sec. 892 in the manner suggested herein. 3 Press Release, U.S. Committee on Finance, Baucus, Grassley Seek JCT Analysis of U.S. Taxation of Sovereign Wealth Funds, Mar. 13, While the focus of Congress and the press has been on the investment by foreign SWFs into the United States, some SWFs are domestic, such as the Alaska Permanent Reserve Fund, which the IMF has estimated holds $40 billion. 4 Id. 5 Unless otherwise indicated, all section references are to the Internal Revenue Code of 1986, as amended (the Code ) or the Treasury regulations promulgated thereunder. 6 Codified in Code Secs. 897, 1445 and 6039C. 7 T.D. 8211, 53 FR (1988). T.D later finalized Reg (a)(3) and (4), which as modified provide that a partnership may be a controlled commercial entity. 8 Code Sec. 6232, which provides that temporary regulations expire three years after their date of issuance, applies only with respect to temporary regulations issued after November 20, 1988, and thus has no application to Reg T et seq. 9 Temporary Reg T(a)(1). This definition was originally promulgated as part of the 1980 regulations. But see L. Vial, 15 TC 403, Dec. 17,870 (1950), acq d, CB 4 (holding that a corporation serving governmental functions for Chile could qualify for exemption under the predecessor to Code Sec. 892). 10 Temporary Reg T(a)(2). 11 Id. 12 Temporary Reg T(a)(2). 13 Reg T(c). A fund that is an integral part may also qualify for the exemption under Code Sec Code Sec. 892; Temporary Reg T(a). 15 Temporary Reg T(a). 16 Temporary Reg T(a)(3). 17 Temporary Reg T(a)(5). 18 Temporary Reg T(a)(4). 19 Temporary Reg T(a)(3). 20 Temporary Reg T(b). See also, Quantas Airways Ltd., CtCls, 97-1 USTC 50,344, aff d, CA-FC, 98-2 USTC 50,859 (lease of excess office space considered a commercial activity). 21 Temporary Reg T(c). Presumably, investments in U.S. stocks, bonds and other securities under Code Sec. 892 would also include derivatives, since the proposed regulations extend the exclusion from a Code Sec. 864(b) U.S. trade or business to income from trading derivatives. Proposed Reg (b)-1(a). Cultural events, nonprofit activities and governmental functions are also not commercial activities. Temporary Reg T(c). 22 Code Sec. 892(a)(2)(B). 23 Temporary Reg T(c)(2). 24 Temporary Reg T(d)(4), Example Foreign corporations and nonresident aliens are generally exempt from U.S. income tax on gain from the sale of stock unless such gain is effectively connected with a U.S. trade or business or deemed to be effectively connected under Code Sec Code Secs. 860, 871 and Temporary Reg T(b), Example Temporary Reg T(a)(1). The exclusion of income from direct interest in real property is particularly interesting in light of the exclusion of new leases from commercial activity. 28 Code Sec. 897(h)(i). The notice and regulations refer to a qualified investment entity which includes a REIT or a regulated investment company. For purposes of this memorandum we refer to a REIT when discussing these rules. 29 Code Sec. 892; Temporary Reg T. 30 See Reg (e)(3) (also covering redemptions of REIT stock treated as a sale or exchange). cf. Peter Genz, Tax Issue Arising in REIT Liquidations (Jan. 15, 2008) (distributed at ABA Tax Section meeting in Las Vega, Nevada). 31 Notice , IRB , Certain foreign organizations qualify for exemption under Code Sec. 501(a), but the focus of this discussion in on domestic taxexempt organizations. 33 Code Sec S. REP. NO. 2375, 81st Cong., 2d Sess., CB 483, Code Sec Code Sec. 512(b). 37 Code Sec Code Sec. 512(b)(3). 39 Code Sec. 512(b)(5). 40 Temporary Reg T(a). 41 Temporary Reg (b)-1(l)(4)(a). 42 Code Sec. 501(b). 43 Code Sec. 512(c)(1); Reg (c) Temporary Reg T(d)(3). Query, however, whether Rev. Rul would be upheld by a court? 45 Any gain, derived from the disposition of a U.S. real property interest defined in 897(c)(1)(A)(i) shall in no event qualify for exemption under 892. Reg T(a)(1). 46 Code Sec. 512(b)(3). 47 Code Sec. 512(b)(5). 48 Code Sec Code Sec. 514(b)(1). 50 Code Sec. 514(c)(9). 51 Code Sec. 856(h)(3)(C). 52 Id. 53 Often, the practical implications of the availability of Code Sec. 892 exemption to pension funds are small because of the availability for exemption under tax treaties with the United States. However, related party dividends and interest are generally excluded from treaty benefits and there is usually no exemption from FIRPTA for interests in noncontrolled USRPHCs. 54 Temporary Reg T(b)(3). The temporary Treasury regulation provides further, however, that even if a pension trust earns no income that would be UBIT (and thus is not a controlled commercial entity), its income from commercial activities will not be exempt under Code Sec Because the income is of the type described in Temporary Reg T and is not income from commercial activities as described in Temporary Reg T. Temporary Reg T(b)(3). This article is reprinted with the publisher s permission from the INTERNATIONAL TAX JOURNAL, a bimonthly journal published by CCH, a Wolters Kluwer business. Copying or distribution without the publisher s permission is prohibited. To subscribe to the Journal of INTERNATIONAL TAX JOURNAL or other CCH Journals please call or visit All views expressed in the articles and columns are those of the author and not necessarily those of CCH. INTERNATIONAL TAX JOURNAL 11