Taxation of regulated investment companies and their shareholders

26 U.S.C. § 852
in effect
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(a) Requirements applicable to regulated investment companiesThe provisions of this part (other than subsection (c) of this section) shall not be applicable to a regulated investment company for a taxable year unless—(1) the deduction for dividends paid during the taxable year (as defined in section 561, but without regard to capital gain dividends) equals or exceeds the sum of—(A) 90 percent of its investment company taxable income for the taxable year determined without regard to subsection (b)(2)(D); and (B) 90 percent of the excess of (i) its interest income excludable from gross income under section 103(a) over (ii) its deductions disallowed under sections 265 and 171(a)(2), and (2) either—(A) the provisions of this part applied to the investment company for all taxable years ending on or after November 8, 1983, or (B) as of the close of the taxable year, the investment company has no earnings and profits accumulated in any taxable year to which the provisions of this part (or the corresponding provisions of prior law) did not apply to it. The Secretary may waive the requirements of paragraph (1) for any taxable year if the regulated investment company establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section 4982. (b) Method of taxation of companies and shareholders(1) Imposition of tax on regulated investment companiesThere is hereby imposed for each taxable year upon the investment company taxable income of every regulated investment company a tax computed as provided in section 11, as though the investment company taxable income were the taxable income referred to in section 11. (2) Investment company taxable incomeThe investment company taxable income shall be the taxable income of the regulated investment company adjusted as follows:(A) There shall be excluded the amount of the net capital gain, if any. (B) The net operating loss deduction provided in section 172 shall not be allowed. (C) The deductions for corporations provided in part VIII (except section 248) in subchapter B (section 241 and following, relating to the deduction for dividends received, etc.) shall not be allowed. (D) The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without regard to capital gain dividends and exempt-interest dividends. (E) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual accounting period). (F) The taxable income shall be computed without regard to section 454(b) (relating to short-term obligations issued on a discount basis) if the company so elects in a manner prescribed by the Secretary. (G) There shall be deducted an amount equal to the tax imposed by subsections (d)(2) and (i) of section 851 for the taxable year. (3) Capital gains(A) Imposition of taxThere is hereby imposed for each taxable year in the case of every regulated investment company a tax, determined as provided in section 11(b), on the excess, if any, of the net capital gain over the deduction for dividends paid (as defined in section 561) determined with reference to capital gain dividends only. (B) Treatment of capital gain dividends by shareholdersA capital gain dividend shall be treated by the shareholders as a gain from the sale or exchange of a capital asset held for more than 1 year. (C) Definition of capital gain dividendFor purposes of this part—(i) In generalExcept as provided in clause (ii), a capital gain dividend is any dividend, or part thereof, which is reported by the company as a capital gain dividend in written statements furnished to its shareholders. (ii) Excess reported amountsIf the aggregate reported amount with respect to the company for any taxable year exceeds the net capital gain of the company for such taxable year, a capital gain dividend is the excess of—(I) the reported capital gain dividend amount, over (II) the excess reported amount which is allocable to such reported capital gain dividend amount. (iii) Allocation of excess reported amount(I) In generalExcept as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported capital gain dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported capital gain dividend amount bears to the aggregate reported amount. (II) Special rule for noncalendar year taxpayersIn the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting “post-December reported amount” for “aggregate reported amount” and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year. (iv) DefinitionsFor purposes of this subparagraph—(I) Reported capital gain dividend amountThe term “reported capital gain dividend amount” means the amount reported to its shareholders under clause (i) as a capital gain dividend. (II) Excess reported amountThe term “excess reported amount” means the excess of the aggregate reported amount over the net capital gain of the company for the taxable year. (III) Aggregate reported amountThe term “aggregate reported amount” means the aggregate amount of dividends reported by the company under clause (i) as capital gain dividends for the taxable year (including capital gain dividends paid after the close of the taxable year described in section 855). (IV) Post-December reported amountThe term “post-December reported amount” means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year. (v) Adjustment for determinationsIf there is an increase in the excess described in subparagraph (A) for the taxable year which results from a determination (as defined in section 860(e)), the company may, subject to the limitations of this subparagraph, increase the amount of capital gain dividends reported under clause (i). (vi) Special rule for losses late in the calendar year For special rule for certain losses after October 31, see paragraph (8). (D) Treatment by shareholders of undistributed capital gains(i) Every shareholder of a regulated investment company at the close of the company’s taxable year shall include, in computing his long-term capital gains in his return for his taxable year in which the last day of the company’s taxable year falls, such amount as the company shall designate in respect of such shares in a written notice mailed to its shareholders at any time prior to the expiration of 60 days after close of its taxable year, but the amount so includible by any shareholder shall not exceed that part of the amount subjected to tax in subparagraph (A) which he would have received if all of such amount had been distributed as capital gain dividends by the company to the holders of such shares at the close of its taxable year. (ii) For purposes of this title, every such shareholder shall be deemed to have paid, for his taxable year under clause (i), the tax imposed by subparagraph (A) on the amounts required by this subparagraph to be included in respect of such shares in computing his long-term capital gains for that year; and such shareholder shall be allowed credit or refund, as the case may be, for the tax so deemed to have been paid by him. (iii) The adjusted basis of such shares in the hands of the shareholder shall be increased, with respect to the amounts required by this subparagraph to be included in computing his long-term capital gains, by the difference between the amount of such includible gains and the tax deemed paid by such shareholder in respect of such shares under clause (ii). (iv) In the event of such designation the tax imposed by subparagraph (A) shall be paid by the regulated investment company within 30 days after close of its taxable year. (v) The earnings and profits of such regulated investment company, and the earnings and profits of any such shareholder which is a corporation, shall be appropriately adjusted in accordance with regulations prescribed by the Secretary. (E) Certain distributionsIn the case of a distribution to which section 897 does not apply by reason of the second sentence of section 897(h)(1), the amount of such distribution which would be included in computing long-term capital gains for the shareholder under subparagraph (B) or (D) (without regard to this subparagraph)—(i) shall not be included in computing such shareholder’s long-term capital gains, and (ii) shall be included in such shareholder’s gross income as a dividend from the regulated investment company. (4) Loss on sale or exchange of stock held 6 months or less(A) Loss attributable to capital gain dividendIf—(i) subparagraph (B) or (D) of paragraph (3) provides that any amount with respect to any share is to be treated as long-term capital gain, and (ii) such share is held by the taxpayer for 6 months or less, then any loss (to the extent not disallowed under subparagraph (B)) on the sale or exchange of such share shall, to the extent of the amount described in clause (i), be treated as a long-term capital loss. (B) Loss attributable to exempt-interest dividendIf—(i) a shareholder of a regulated investment company receives an exempt-interest dividend with respect to any share, and (ii) such share is held by the taxpayer for 6 months or less, then any loss on the sale or exchange of such share shall, to the extent of the amount of such exempt-interest dividend, be disallowed. (C) Determination of holding periodsFor purposes of this paragraph, in determining the period for which the taxpayer has held any share of stock—(i) the rules of paragraphs (3) and (4) of section 246(c) shall apply, and (ii) there shall not be taken into account any day which is more than 6 months after the date on which such share becomes ex-dividend. (D) Losses incurred under a periodic liquidation planTo the extent provided in regulations, subparagraphs (A) and (B) shall not apply to losses incurred on the sale or exchange of shares of stock in a regulated investment company pursuant to a plan which provides for the periodic liquidation of such shares. (E) Exception to holding period requirement for certain regularly declared exempt-interest dividends(i) Daily dividend companiesExcept as otherwise provided by regulations, subparagraph (B) shall not apply with respect to a regular dividend paid by a regulated investment company which declares exempt-interest dividends on a daily basis in an amount equal to at least 90 percent of its net tax-exempt interest and distributes such dividends on a monthly or more frequent basis. (ii) Authority to shorten required holding period with respect to other companiesIn the case of a regulated investment company (other than a company described in clause (i)) which regularly distributes at least 90 percent of its net tax-exempt interest, the Secretary may by regulations prescribe that subparagraph (B) (and subparagraph (C) to the extent it relates to subparagraph (B)) shall be applied on the basis of a holding period requirement shorter than 6 months; except that such shorter holding period requirement shall not be shorter than the greater of 31 days or the period between regular distributions of exempt-interest dividends. (5) Exempt-interest dividendsIf, at the close of each quarter of its taxable year, at least 50 percent of the value (as defined in section 851(c)(4)) of the total assets of the regulated investment company consists of obligations described in section 103(a), such company shall be qualified to pay exempt-interest dividends, as defined herein, to its shareholders.(A) Definition of exempt-interest dividend(i) In generalExcept as provided in clause (ii), an exempt-interest dividend is any dividend or part thereof (other than a capital gain dividend) paid by a regulated investment company and reported by the company as an exempt-interest dividend in written statements furnished to its shareholders. (ii) Excess reported amountsIf the aggregate reported amount with respect to the company for any taxable year exceeds the exempt interest of the company for such taxable year, an exempt-interest dividend is the excess of—(I) the reported exempt-interest dividend amount, over (II) the excess reported amount which is allocable to such reported exempt-interest dividend amount. (iii) Allocation of excess reported amount(I) In generalExcept as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported exempt-interest dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported exempt-interest dividend amount bears to the aggregate reported amount. (II) Special rule for noncalendar year taxpayersIn the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting “post-December reported amount” for “aggregate reported amount” and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year. (iv) DefinitionsFor purposes of this subparagraph—(I) Reported exempt-interest dividend amountThe term “reported exempt-interest dividend amount” means the amount reported to its shareholders under clause (i) as an exempt-interest dividend. (II) Excess reported amountThe term “excess reported amount” means the excess of the aggregate reported amount over the exempt interest of the company for the taxable year. (III) Aggregate reported amountThe term “aggregate reported amount” means the aggregate amount of dividends reported by the company under clause (i) as exempt-interest dividends for the taxable year (including exempt-interest dividends paid after the close of the taxable year described in section 855). (IV) Post-December reported amountThe term “post-December reported amount” means the aggregate reported amount determined by taking into account only dividends paid after December 31 of the taxable year. (V) Exempt interestThe term “exempt interest” means, with respect to any regulated investment company, the excess of the amount of interest excludable from gross income under section 103(a) over the amounts disallowed as deductions under sections 265 and 171(a)(2). (B) Treatment of exempt-interest dividends by shareholdersAn exempt-interest dividend shall be treated by the shareholders for all purposes of this subtitle as an item of interest excludable from gross income under section 103(a). Such purposes include but are not limited to—(i) the determination of gross income and taxable income, (ii) the determination of distributable net income under subchapter J, (iii) the allowance of, or calculation of the amount of, any credit or deduction, and (iv) the determination of the basis in the hands of any shareholder of any share of stock of the company. (6) Section 311(b) not to apply to certain distributionsSection 311(b) shall not apply to any distribution by a regulated investment company to which this part applies, if such distribution is in redemption of its stock upon the demand of the shareholder. (7) Time certain dividends taken into accountFor purposes of this title, any dividend declared by a regulated investment company in October, November, or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed—(A) to have been received by each shareholder on December 31 of such calendar year, and (B) to have been paid by such company on December 31 of such calendar year (or, if earlier, as provided in section 855). The preceding sentence shall apply only if such dividend is actually paid by the company during January of the following calendar year. (8) Elective deferral of certain late-year losses(A) In generalExcept as otherwise provided by the Secretary, a regulated investment company may elect for any taxable year to treat any portion of any qualified late-year loss for such taxable year as arising on the first day of the following taxable year for purposes of this title. (B) Qualified late-year lossFor purposes of this paragraph, the term “qualified late-year loss” means—(i) any post-October capital loss, and (ii) any late-year ordinary loss. (C) Post-October capital lossFor purposes of this paragraph, the term “post-October capital loss” means—(i) any net capital loss attributable to the portion of the taxable year after October 31, or (ii) if there is no such loss—(I) any net long-term capital loss attributable to such portion of the taxable year, or (II) any net short-term capital loss attributable to such portion of the taxable year. (D) Late-year ordinary lossFor purposes of this paragraph, the term “late-year ordinary loss” means the sum of any post-October specified loss and any post-December ordinary loss. (E) Post-October specified lossFor purposes of this paragraph, the term “post-October specified loss” means the excess (if any) of—(i) the specified losses (as defined in section 4982(e)(5)(B)(ii)) attributable to the portion of the taxable year after October 31, over (ii) the specified gains (as defined in section 4982(e)(5)(B)(i)) attributable to such portion of the taxable year. (F) Post-December ordinary lossFor purposes of this paragraph, the term “post-December ordinary loss” means the excess (if any) of—(i) the ordinary losses not described in subparagraph (E)(i) and attributable to the portion of the taxable year after December 31, over (ii) the ordinary income not described in subparagraph (E)(ii) and attributable to such portion of the taxable year. (G) Special rule for companies determining required capital gain distributions on taxable year basisIn the case of a company to which an election under section 4982(e)(4) applies—(i) if such company’s taxable year ends with the month of November, the amount of qualified late-year losses (if any) shall be computed without regard to any income, gain, or loss described in subparagraphs (C) and (E), and (ii) if such company’s taxable year ends with the month of December, subparagraph (A) shall not apply. (9) Dividends treated as received by company on ex-dividend dateFor purposes of this title, if a regulated investment company is the holder of record of any share of stock on the record date for any dividend payable with respect to such stock, such dividend shall be included in gross income by such company as of the later of—(A) the date such share became ex-dividend with respect to such dividend, or (B) the date such company acquired such share. (c) Earnings and profits(1) Treatment of nondeductible items(A) Net capital lossIf a regulated investment company has a net capital loss for any taxable year—(i) such net capital loss shall not be taken into account for purposes of determining the company’s earnings and profits, and (ii) any capital loss arising on the first day of the next taxable year by reason of clause (ii) or (iii) of section 1212(a)(3)(A) shall be treated as so arising for purposes of determining earnings and profits. (B) Other nondeductible items(i) In generalThe earnings and profits of a regulated investment company for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction (other than by reason of section 265 or 171(a)(2)) in computing its taxable income for such taxable year. (ii) Coordination with treatment of net capital lossesClause (i) shall not apply to a net capital loss to which subparagraph (A) applies. (2) Coordination with tax on undistributed incomeFor purposes of applying this chapter to distributions made by a regulated investment company with respect to any calendar year, the earnings and profits of such company shall be determined without regard to any net capital loss attributable to the portion of the taxable year after October 31, without regard to any late-year ordinary loss (as defined in subsection (b)(8)(D)), without regard to any capital loss arising on the first day of the taxable year by reason of clauses (ii) and (iii) of section 1212(a)(3)(A), and with such other adjustments as the Secretary may prescribe. The preceding sentence shall apply—(A) only to the extent that the amount distributed by the company with respect to the calendar year does not exceed the required distribution for such calendar year (as determined under section 4982 by substituting “100 percent” for each percentage set forth in section 4982(b)(1)), and (B) except as provided in regulations, only if an election under section 4982(e)(4) is not in effect with respect to such company. (3) Distributions to meet requirements of subsection (a)(2)(B)Any distribution which is made in order to comply with the requirements of subsection (a)(2)(B)—(A) shall be treated for purposes of this subsection and subsection (a)(2)(B) as made from earnings and profits which, but for the distribution, would result in a failure to meet such requirements (and allocated to such earnings on a first-in, first-out basis), and (B) to the extent treated under subparagraph (A) as made from accumulated earnings and profits, shall not be treated as a distribution for purposes of subsection (b)(2)(D) and section 855. (4) Regulated investment companyFor purposes of this subsection, the term “regulated investment company” includes a domestic corporation which is a regulated investment company determined without regard to the requirements of subsection (a). (d) Distributions in redemption of interests in unit investment trustsIn the case of a unit investment trust—(1) which is registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1 and following) and issues periodic payment plan certificates (as defined in such Act), and (2) substantially all of the assets of which consist of securities issued by a management company (as defined in such Act), section 562(c) (relating to preferential dividends) shall not apply to a distribution by such trust to a holder of an interest in such trust in redemption of part or all of such interest, with respect to the capital gain net income of such trust attributable to such redemption. (e) Procedures similar to deficiency dividend procedures made applicable(1) In generalIf—(A) there is a determination that the provisions of this part do not apply to an investment company for any taxable year (hereinafter in this subsection referred to as the “non-RIC year”), and (B) such investment company meets the distribution requirements of paragraph (2) with respect to the non-RIC year, for purposes of applying subsection (a)(2) to subsequent taxable years, the provisions of this part shall be treated as applying to such investment company for the non-RIC year. If the determination under subparagraph (A) is solely as a result of the failure to meet the requirements of subsection (a)(2), the preceding sentence shall also apply for purposes of applying subsection (a)(2) to the non-RIC year and the amount referred to in paragraph (2)(A)(i) shall be the portion of the accumulated earnings and profits which resulted in such failure. (2) Distribution requirements(A) In generalThe distribution requirements of this paragraph are met with respect to any non-RIC year if, within the 90-day period beginning on the date of the determination (or within such longer period as the Secretary may permit), the investment company makes 1 or more qualified designated distributions and the amount of such distributions is not less than the excess of—(i) the portion of the accumulated earnings and profits of the investment company (as of the date of the determination) which are attributable to the non-RIC year, over (ii) any interest payable under paragraph (3). (B) Qualified designated distributionFor purposes of this paragraph, the term “qualified designated distribution” means any distribution made by the investment company if—(i) section 301 applies to such distribution, and (ii) such distribution is designated (at such time and in such manner as the Secretary shall by regulations prescribe) as being taken into account under this paragraph with respect to the non-RIC year. (C) Effect on dividends paid deductionAny qualified designated distribution shall not be included in the amount of dividends paid for purposes of computing the dividends paid deduction for any taxable year. (3) Interest charge(A) In generalIf paragraph (1) applies to any non-RIC year of an investment company, such investment company shall pay interest at the underpayment rate established under section 6621—(i) on an amount equal to 50 percent of the amount referred to in paragraph (2)(A)(i), (ii) for the period—(I) which begins on the last day prescribed for payment of the tax imposed for the non-RIC year (determined without regard to extensions), and (II) which ends on the date the determination is made. (B) Coordination with subtitle FAny interest payable under subparagraph (A) may be assessed and collected at any time during the period during which any tax imposed for the taxable year in which the determination is made may be assessed and collected. (4) Provision not to apply in the case of fraudThe provisions of this subsection shall not apply if the determination contains a finding that the failure to meet any requirement of this part was due to fraud with intent to evade tax. (5) DeterminationFor purposes of this subsection, the term “determination” has the meaning given to such term by section 860(e). Such term also includes a determination by the investment company filed with the Secretary that the provisions of this part do not apply to the investment company for a taxable year. (f) Treatment of certain load charges(1) In generalIf—(A) the taxpayer incurs a load charge in acquiring stock in a regulated investment company and, by reason of incurring such charge or making such acquisition, the taxpayer acquires a reinvestment right, (B) such stock is disposed of before the 91st day after the date on which such stock was acquired, and (C) the taxpayer acquires, during the period beginning on the date of the disposition referred to in subparagraph (B) and ending on January 31 of the calendar year following the calendar year that includes the date of such disposition, stock in such regulated investment company or in another regulated investment company and the otherwise applicable load charge is reduced by reason of the reinvestment right, the load charge referred to in subparagraph (A) (to the extent it does not exceed the reduction referred to in subparagraph (C)) shall not be taken into account for purposes of determining the amount of gain or loss on the disposition referred to in subparagraph (B). To the extent such charge is not taken into account in determining the amount of such gain or loss, such charge shall be treated as incurred in connection with the acquisition referred to in subparagraph (C) (including for purposes of reapplying this paragraph). (2) Definitions and special rulesFor purposes of this subsection—(A) Load chargeThe term “load charge” means any sales or similar charge incurred by a person in acquiring stock of a regulated investment company. Such term does not include any charge incurred by reason of the reinvestment of a dividend. (B) Reinvestment rightThe term “reinvestment right” means any right to acquire stock of 1 or more regulated investment companies without the payment of a load charge or with the payment of a reduced charge. (C) Nonrecognition transactionsIf the taxpayer acquires stock in a regulated investment company from another person in a transaction in which gain or loss is not recognized, the taxpayer shall succeed to the treatment of such other person under this subsection. (g) Special rules for fund of funds(1) In generalIn the case of a qualified fund of funds—(A) such fund shall be qualified to pay exempt-interest dividends to its shareholders without regard to whether such fund satisfies the requirements of the first sentence of subsection (b)(5), and (B) such fund may elect the application of section 853 (relating to foreign tax credit allowed to shareholders) without regard to the requirement of subsection (a)(1) thereof. (2) Qualified fund of fundsFor purposes of this subsection, the term “qualified fund of funds” means a regulated investment company if (at the close of each quarter of the taxable year) at least 50 percent of the value of its total assets is represented by interests in other regulated investment companies.

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