Code Section 851
| Code Section | Effective Date | Name of Act | Name of Provision | 10yr Revenue Estimate ($millions) |
|---|---|---|---|---|
| 851(d) and (i) | *12/22/2010 | Regulated Investment Company Modernization Act of 2010 | Savings Provisions for Failures of RICs to Satisfy Gross Income and Asset Tests | Gain of less than .5 |
*Notes on Effective Date
The provision applies to taxable years with respect to which the due date (determined with regard to extensions) of the return of tax is after the date of enactment (December 22, 2010).
Savings Provisions for Failures of RICs to Satisfy Gross Income and Asset Tests
Explanation of Provision
- Saving provision for asset test failures
- Saving provision for gross income test failures
- Calculation of investment company taxable income
1. Saving provision for asset test failures
The Act provides a special rule for de minimis asset test failures and a mechanism by which a RIC can cure other asset test failures and pay a penalty tax. The rule for de minimis asset test failures applies if a RIC fails to meet one of the asset tests in section 851(b)(3) due to the ownership of assets the total value of which does not exceed the lesser of (i) one percent of the total value of the RIC’s assets at the end of the quarter for which the assets are valued, and (ii) $10 million. Where the de minimis rule applies, the RIC shall nevertheless be considered to have satisfied the asset tests if, within six months of the last day of the quarter in which the RIC identifies that it failed the asset test (or such other time period provided by the Secretary) the RIC: (i) disposes of assets in order to meet the requirements of the asset tests, or (ii) the RIC otherwise meets the requirements of the asset tests.
In the case of other asset test failures, a RIC shall nevertheless be considered to have met the asset tests if: (i) the RIC sets forth in a schedule filed in the manner provided by the Secretary a description of each asset that causes the RIC to fail to satisfy the asset test; (ii) the failure to meet the asset tests is due to reasonable cause and not due to willful neglect; and (iii) within six months of the last day of the quarter in which the RIC identifies that it failed the asset test (or such other time period provided by the Secretary) the RIC (I) disposes of the assets which caused the asset test failure, or (II) otherwise meets the requirements of the
asset tests. In cases of asset test failures other than de minimis failures, the provision imposes a tax in an amount equal to the greater of (i) $50,000 or (ii) the amount determined (pursuant to regulations promulgated by the Secretary) by multiplying the highest rate of tax specified in section 11 (currently 35 percent) by the net income generated during the period of asset test failure by the assets that caused the RIC to fail the asset test. For purposes of subtitle F, the tax imposed for an asset test failure is treated as excise tax with respect to which the deficiency procedures apply.
These provisions added by the Act do not apply to any quarter in which a corporation’s status as a RIC is preserved under the provision of present law.
2. Saving provision for gross income test failures
The Act provides that a corporation that fails to meet the gross income test shall nevertheless be considered to have satisfied the test if, following the corporation’s failure to meet the test for the taxable year, the corporation (i) sets forth in a schedule, filed in the manner provided by the Secretary, a description of each item of its gross income and (ii) the failure to meet the gross income test is due to reasonable cause and is not due to willful neglect.
In addition, under the Act, a tax is imposed on any RIC that fails to meet the gross income test equal to the amount by which the RIC’s gross income from sources which are not qualifying income exceeds one-ninth of its gross income from sources which are qualifying income. For example, if a RIC has $90x of gross income of sources which are qualifying income and $15x of gross income from other sources, a tax of $5x is imposed. The tax is the amount by which the $15x gross income from sources which are not qualifying income exceeds the $10x permitted under present law.
3. Calculation of investment company taxable income
Taxes imposed for failure of the asset or income tests are deductible for purposes of calculating investment company taxable income.
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