Code Section 852(c)(1)

Code Section Effective Date Name of Act Name of Provision
852(c)(1) 12/22/2010 Regulated Investment Company Modernization Act of 2010 Earnings and Profits of RICs

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).

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