Code Section 1212
| Code Section | Effective Date | Name of Act | Name of Provision | 10yr Revenue Estimate ($millions) |
|---|---|---|---|---|
| 1212(a) | 12/22/2010 | Regulated Investment Company Modernization Act of 2010 | Capital Loss Carryovers of RICs | 104 |
* Notes on Effective Date
The provision generally applies to net capital losses for taxable years beginning after the date of enactment (December 22, 2010). The provision relating to the treatment of present-law carryovers applies to taxable years beginning after the date of enactment (December 22, 2010).
Capital Loss Carryovers of RICs
Explanation of Provision
1. In general
The Act provides capital loss carryover treatment for RICs similar to the present-law treatment of net capital loss carryovers applicable to individuals. Under the Act, if a RIC has a net capital loss for a taxable year, the excess (if any) of the net short-term capital loss over the net long-term capital gain is treated as a short-term capital loss arising on the first day of the next taxable year, and the excess (if any) of the net long-term capital loss over the net short-term capital gain is treated as a long-term capital loss arising on the first day of the next taxable year.1868 The number of taxable years that a net capital loss of a RIC may be carried over under the provision is not limited.
2. Coordination with present-law carryovers
The Act provides for the treatment of net capital loss carryovers under the present law rules to taxable years of a RIC beginning after the date of enactment (December 22, 2010). These rules apply to (1) capital loss carryovers from taxable years beginning on or before the date of enactment (December 22, 2010) and (2) capital loss carryovers from other taxable years prior to the taxable year the corporation became a RIC.
Amounts treated as a long-term or short-term capital loss arising on the first day of the next taxable year under the provision are determined without regard to amounts treated as a short-term capital loss under the present-law carryover rule. In determining the amount by which a present-law carryover is reduced by capital gain net income for a prior taxable year, any capital loss treated as arising on the first day of the prior taxable year under the provision is taken into account in determining capital gain net income for the prior year.
The following example illustrates these rules:
Assume a calendar year RIC has no net capital loss for any taxable year beginning before 2010, a net capital loss of $2 million for 2010; a net capital loss of $1 million for 2011, all of which is a long-term capital loss; and $600,000 gain from the sale of a capital asset held less than one year on July 15, 2012.
For 2012, the RIC has (1) $600,000 short-term capital gain from the July 15 sale, (2) $2 million carryover from 2010 which is treated as a short-term capital loss,1869 and (3) $1 million long-term capital loss from 2011 treated as arising on January 1, 2012. The capital loss allowed in 2012 is limited to $600,000, the amount of capital gain for the taxable year.
For purposes of determining the amount of the $2 million net capital loss that may be carried over from 2010 to 2013, there is no capital gain net income for 2012 because the $600,000 gain does not exceed the $1 million long-term loss treated as arising on January 1, 2012; therefore the entire 2010 net capital loss is carried over to 2013 and treated as a short-term capital loss in 2013. $400,000 (the excess of the $1 million long-term capital loss treated as arising on January 1, 2012, over the $600,000 short-term capital gain for 2012) is treated as a long-term capital loss on January 1, 2013. The 2010 net capital loss may continue to be carried over through 2018, subject to reduction by capital gain net income; no limitation applies on the number of taxable years that the 2011 net capital loss may be carried over.
Back to Explanation of Provision
1868- For earnings and profits treatment of a RIC’s net capital loss, see section 302 of the Act.
-Return to Explanation of Provision
1869- The present-law treatment of net capital losses arising in taxable years beginning before the date of enactment (December 22, 2010) continues to apply.
-Return to Explanation of Provision
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