Code Section 852

Code Section	Effective Date	Name of Act	Name of Provision	10yr Revenue Estimate ($millions)
852(b)	*12/22/2010	Regulated Investment Company Modernization Act of 2010	Modification of Dividend Designation Requirements and Allocation Rules for RICs	Loss of less than .5
852(g)	12/22/2010	Regulated Investment Company Modernization Act of 2010	Pass-thru of Exempt-interest Dividends and Foreign Tax Credits in Fund of Funds Structures	-41
852(b)(4)	**12/22/2010	Regulated Investment Company Modernization Act of 2010	Exception to Holding Period Requirement for Exempt-Interest Dividends Declared on Daily Basis	Loss of less than .5
852(b)(8)	12/22/2010	Regulated Investment Company Modernization Act of 2010	Elective Deferral of Certain Late-Year Losses of RICs	Loss of less than .5
852(c)(1)	12/22/2010	Regulated Investment Company Modernization Act of 2010	Earnings and Profits of RICs	Loss of less than .5
852(f)(1)	12/22/2010	Regulated Investment Company Modernization Act of 2010	Modification of Sale Load Basis Deferral Rule for RICs	-26

* Notes on Effective Date

The provision applies to taxable years beginning after the date of enactment (December 22, 2010).¹⁸⁸⁶

** Notes on Effective Date

The provision applies to stock for which the taxpayer’s holding period begins after the date of enactment (December 22, 2010).

Modification of Dividend Designation Requirements and Allocation Rules for RICs

Explanation of Provision

Capital gain dividends

Reporting requirements
The provision replaces the present-law designation requirement for a capital gain dividend with a requirement that a capital gain dividend be reported by the RIC in written statements furnished to its shareholders. A written statement furnishing this information to a shareholder may be a Form 1099.

Allocation by fiscal year RICs
The provision provides a special rule allocating the excess reported amount ¹⁸⁸³ for taxable year RICs in order to reduce the need for RICs to amend Form 1099s and shareholders to file amended income tax returns. This special allocation rule applies to a taxable year of a RIC which includes more than one calendar year if the RIC’s post-December reported amount ¹⁸⁸⁴ exceeds the excess reported amount for the taxable year.

For example, assume a RIC for its taxable year ending June 30, 2012, makes quarterly distributions of $30,000 on September 30, 2011, December 31, 2011, March 31, 2012, and June 30, 2012, and reports the amounts as capital gain dividends. If the RIC has only $100,000 net capital gain for its taxable year, the excess reported amount is $20,000. Because the post-December reported amount ($60,000) exceeds the excess reported amount ($20,000), the excess reported amount is allocated among the post-December reported capital gain dividends in proportion to the amount of each such distribution reported as a capital gain dividend. Thus, one-half of the excess reported amount (i.e., 1/2 of $20,000 = $10,000) is allocated to each post-December distribution, reducing the amount of each post-December distribution treated as a capital gain dividend from $30,000 to $20,000. Because no excess reported amount is allocated to either of the quarterly distributions made on or before December 31, 2011, the entire $30,000 of each of the distributions retains its character as a capital gain dividend.

If, in the above example, the RIC has only $40,000 net capital gain for its taxable year, the excess reported amount is $80,000. Because the post-December reported amount ($60,000) does not exceed the excess reported amount ($80,000), the excess reported amount is allocated among all the reported capital gain dividends for the taxable year in proportion to the amount of each distribution reported as a capital gain dividend. Thus, one-fourth of the excess reported amount (i.e., 1/4 of $80,000 = $20,000) is allocated to each distribution, reducing the amount of each distribution treated as a capital gain dividend from $30,000 to $10,000.

Other designated items

The provision replaces the other designation requirements described under present law with a requirement that amounts be reported by the RIC in written statements furnished to its shareholders.¹⁸⁸⁵

The provision also provides allocation rules for excess reported amounts of exempt-interest dividends and certain dividends paid to nonresident alien individuals and foreign corporations by fiscal year RICs similar to the rule described above applicable capital gain dividends.

Pass-thru of Exempt-interest Dividends and Foreign Tax Credits in Fund of Funds Structures

Explanation of Provision

Under the provision, in the case of a qualified fund of funds, the RIC may (1) pay exempt-interest dividends without regard to the requirement that at least 50 percent of the value of its total assets consist of tax-exempt State and local bonds and (2) elect to allow its shareholders the foreign tax credit without regard to the requirement that more than 50 percent of the value of its total assets consist of stock or securities in foreign corporations.

For this purpose, a qualified fund of funds means a RIC at least 50 percent of the value of the total assets of which (at the close of each quarter of the taxable year) is represented by interests in other RICs.

Exception to Holding Period Requirement for Exempt-Interest Dividends Declared on Daily Basis

Explanation of Provision

The provision makes the loss disallowance rule inapplicable, except as otherwise provided by regulations, with respect to a regular dividend paid by a RIC that 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 the dividends on a monthly or more frequent basis.

Elective Deferral of Certain Late-Year Losses of RICs

Explanation of Provision

Post-October capital losses

Under the provision, except to the extent provided in regulations, a RIC may elect to ‘‘push’’ to the first day of the next taxable year part or all of any post-October capital loss. The post-October capital loss means the greatest of the RIC’s net capital loss, net long-term capital loss, or the net short-term capital loss (attributable to the portion of the taxable year after October 31).¹⁹¹²

The election ¹⁹¹³ applies for all purposes of the Code, including determining taxable income, net capital gain, net short-term capital gain, and earnings and profits.

The application of the provision to short-term capital losses may be illustrated by the following example:

Assume a RIC for its taxable year ending June 30, 2012, recognizes a short-term capital gain of $1 million on September 15, 2011. In order to avoid the excise tax, the RIC distributes $980,000 on December 15, 2011. On May 15, 2012, the RIC recognizes a $1 million long-term capital gain and $1 million short-term capital loss. The RIC has no other income or loss during 2011, 2012, or 2013 (and has no accumulated earnings and profits).

The RIC may elect to treat the short-term capital loss as arising on July 1, 2012. If the RIC so elects and makes an additional $1 million distribution before July 1, 2012, it may report the distribution as a capital gain dividend and be allowed a dividends paid deduction in computing the tax on its net capital gain for the 2011–2012 taxable year. No amended Forms 1099 and no amended tax returns by the shareholders are required.

Late-year ordinary losses

Under the provision, except to the extent provided in regulations, a RIC may elect to ‘‘push’’ to the first day of the next taxable year part or all of any qualified late-year ordinary loss. The qualified late year ordinary loss is the excess of (1) the sum of the specified losses attributable to the portion of the taxable year after October 31 and other ordinary losses attributable to the portion of the taxable year after December 31, over (2) the sum of the specified gains attributable to the portion of the taxable year after October 31 and other ordinary income attributable to the portion of the taxable year after December 31. Specified losses and gains have the same meaning as used for purposes of the excise tax under section 4982.¹⁹¹⁴

The election applies for all purposes of the Code.

Back to Explanation of Provision

Earnings and Profits of RICs

Explanation of Provision

Net capital loss

The rules applicable to the taxable income treatment of a net capital loss of a RIC apply for purposes of determining earnings and profits (both current earnings and profits and accumulated earnings and profits). Thus, a net capital loss for a taxable year is not taken into account in determining earnings and profits, but any capital loss treated as arising on the first day of the next taxable year is taken into account in determining earnings and profits for the next taxable year (subject to the application of the net capital loss rule for that year).

Exempt-interest expenses

The deductions disallowed in computing investment company taxable income relating to tax-exempt interest are allowed in computing current earnings and profits of a RIC.

In the example under present law, the provision reduces the RIC’s current earnings and profits from $1 million to $990,000 and if the RIC were to distribute $1 million to its shareholders during the taxable year, $990,000 may be reported as exempt-interest dividends and the remaining $10,000 is treated as a return of capital (or gain to the shareholder).

Modification of Sale Load Basis Deferral Rule for RICs

Explanation of Provision

The provision limits the applicability of the provision described under present law to cases where the taxpayer subsequently acquires stock before January 31 of the calendar year following the calendar year the original stock is disposed of.

1883- The ‘‘excess reported amount’’ is the excess of the aggregate amount reported as capital gain dividends for the taxable year over the RIC’s net capital gain for the taxable year.
-Return to Explanation of Provision

1884- The ‘‘post-December reported amount’’ is the aggregate amount reported with respect to items arising after December 31 of the RIC’s taxable year.
-Return to Explanation of Provision

1885- The Act does not change the method of designation of undistributed capital gain taken into account by shareholders under section 852(b)(3)(D)(i).
-Return to Explanation of Provision

1886- Each amendment to a provision relating to qualified dividends of individual shareholders will sunset when the provision to which the amendment was made sunsets pursuant to section 303 of the Jobs and Growth Tax Relief Reconciliation Act. Under present law, these provisions sunset in taxable years beginning after December 31, 2012.
-Return to Explanation of Provision

1912- Special rules apply to certain RICs with taxable years ending with the month of November or December.
-Return to Explanation of Provision

1913- The principles of Treasury Regulation section 1.852–11 are to apply to a qualified late year loss for which an election is made under this provision, subject to any subsequent change in the regulations.
-Return to Explanation of Provision

1914- See explanation of section 402 of the Act.
-Return to Explanation of Provision

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