|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).
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).