Rev. Rul. 90-57
ISSUES
(1) If the first calendar year for which a regulated investment company's (RIC's) election is in effect under section 4982(e)(4) of the Internal Revenue Code (the election year) is not the first calendar year section 4982 applies to the RIC, what period is used under section 4982(e)(2) to determine the RIC's capital gain net income for the election year for purposes of determining the RIC's required distribution under section 4982(b)?
(2) What is the first tax year to which an election under section 4982(e)(4) of the Code "applies" for purposes of section 852(b)(3)(C)?
LAW AND ANALYSIS
Issue 1. Effective for calendar years beginning after December 31, 1986, section 4982(a) of the Code imposes an excise tax on every RIC for each calendar year. The tax is equal to 4 percent of the excess (if any) of the RIC's "required distribution" for the calendar year over the "distributed amount" for the calendar year.
Section 4982(b)(1) of the Code defines the required distribution for a calendar year in general as the sum of 98 percent of the RIC's ordinary income for the calendar year plus 98 percent of the RIC's capital gain net income for the 1-year period ending on October 31 of the calendar year.
Section 4982(c)(1) of the Code defines the distributed amount for a calendar year in general as the sum of the deduction for dividends paid (as defined in section 561) during the calendar year plus any amount on which tax is imposed under section 852(b)(1) or 852(b)(3)(A) for any tax year ending in that calendar year.
Section 4982(c)(2) of the Code provides that the distributed amount for a calendar year is increased by any overdistribution in the preceding year.
Section 4982(e)(2)(A) of the Code provides that, for purposes of section 4982, the term "capital gain net income" has the meaning given to that term by section 1222(9), but determined by treating the 1-year period ending on October 31 of any calendar year as the RIC's tax year. Under section 4982(e)(2)(B), this amount is reduced (but not below the amount of the RIC's net capital gain) by the RIC's net ordinary loss for the calendar year.
Section 4982(e)(2)(C)(i) of the Code provides that, for purposes of section 4982, the term "net capital gain" has the meaning given to that term by section 1222(11), but determined by treating the 1-year period ending on October 31 of any calendar year as the RIC's tax year.
Section 4982(e)(4) of the Code allows a RIC having a tax year ending with the month of November or December to elect to determine its capital gain net income for purposes of sections 4982(b)( 1) and 4982(e)(2) by taking its tax year into account in lieu of the 1-year period ending on October 31 of the calendar year.
Section 5h.5(a)(2)(iv) of the Temporary Regulations -- Elections Under Various Public Laws provides that the election under section 4982(e)(4) of the Code must be filed on or before the later of March 15 of the first calendar year after the end of the first excise tax period for which the election is to be effective or the due date (including any extensions granted) for filing the excise tax return for such period.
For purposes of determining a RIC's required distribution under section 4982(b) of the Code for the calendar year immediately preceding the election year (the preceding calendar year), a RIC's capital gain net income is determined without regard to capital gains and losses that are attributable to the period after October 31 of that year. The RIC's capital gain net income for the election year must therefore be determined by taking into account the RIC's capital gains and losses for the period after October 31 of the preceding calendar year in addition to the RIC's capital gains and losses from the beginning of the election year through the end of its tax year ending in November or December of the election year. If that were not the case, 1 or 2 months of capital gains and losses would never be taken into account for purposes of section 4982.
Issue 2. For purposes of determining the amount a RIC may designate as capital gain dividends for a tax year, section 852(b)(3)(C) of the Code provides a special rule that excludes from the determination of the RIC's net capital gain for the tax year certain capital losses attributable to transactions after October 31 of that tax year (post-October capital losses). This rule applies only to a tax year to which an election under section 4982(e)(4) "does not apply." However, because the excise tax is based on a calendar year, when an election is made, it is necessary to identify the first tax year to which the election "applies" within the meaning of section 852(b)(3)(C).
This special rule concerning post-October capital losses is necessary whenever a RIC's tax year ends after the 1-year period ending October 31 that is used to determine the RIC's capital gain net income for purposes of section 4982 of the Code. By excluding post-October capital losses from the determination of the RIC's net capital gain, the rule better matches the amount the RIC may designate as capital gain dividends for the tax year and the amount the RIC must distribute under section 4982 for the calendar year.
Without the election under section 4982(e)(4) of the Code, a RIC's tax year (other than some short years or a tax year ending October 31) always falls in more than one "1-year period" (that is, the period used under section 4982(b)(1)(B) and 4982(e)(2) to determine the required distribution for purposes of the excise tax). On the other hand, when a RIC makes an election under section 4982(e)(4) of the Code for a calendar year, the "1-year period" of sections 4982(b)(1)(B) and 4982(e)(2) (including, in the case of an election year, the 13- or 14-month period) ends on the last day of the RIC's tax year ending in November (or December) of that calendar year. Thus, the rule of section 852(b)(3)(C) is not necessary for a tax year ending in November (or December) of a calendar year for which the election is in effect.
HOLDINGS
(1) If the first calendar year for which a RIC's election is in effect under section 4982(e)(4) of the Code (the election year) is not the first calendar year section 4982 applies to the RIC, the RIC's capital gain net income for the election year under section 4982(e)(2) for purposes of determining the RIC's required distribution under section 4982(b) is determined on the basis of the period that begins on November 1 of the preceding calendar year and that ends on the last day of the RIC's tax year ending in November (or December) of the election year.
(2) For purposes of section 852(b)(3)(C) of the Code, the first tax year to which an election under section 4982(e)(4) applies is the first tax year ending in November (or December) of the election year.
DRAFTING INFORMATION
The principal author of this revenue ruling is Lauren G. Shaw of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Ms. Shaw on (202) 566-3828 (not a toll-free call).
