PLR 200009056: Funds may revoke capital gain distribution elections

Plain-English summary

Two regulated investment companies had elected to use their calendar tax year, rather than the period ending October 31, to calculate capital gain net income for required distributions under section 4982. They found that the election created administrative burdens and asked to revoke it. The IRS consented, effective for the redacted year and later years. For the first year, each fund must calculate capital gain net income using gains and losses from January 1 through October 31. Neither fund may make another election under section 4982(e)(4)(A) for five calendar years following the year to which the revocation applies.

Ruling snapshot

• Question: May two funds revoke their election to use the calendar tax year for section 4982 capital gain distributions?
• Outcome: Approved revocation with a five year restriction on a new election.
• Key authorities: IRC §§ 4982(b), 4982(e)(4).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Index Number: 4982.00-00
Washington, DC 20224
Person to Contact:
Telephone Number:
Refer Reply To:
CC:DOM:FI&P:3/PLR-114090-99
Date: December 1, 1999

LEGEND:
TY:
Fund A =
Fund B =
Year A =
Year B =
Year C =
Year D =

This is in reply to a letter dated July 21, 1999, on behalf of Fund A and Fund B, seeking consent to revoke, for Year A and subsequent calendar years, a previous election made by each Fund under § 4982(e)(4)(A) of the Internal Revenue Code of 1986, as amended (the “Code”). Additionally, each Fund requests that the calculation of its required distribution of capital gain net income under § 4982(e)(2) for the calendar year ending December 31, Year A, be determined on the basis of capital gains and losses realized and recognized during the ten-month period from January 1, Year A, through October 31, Year A.

FACTS

Each Fund is registered with the Securities and Exchange Commission as a diversified open-end management investment company under the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. Each Fund has elected to be treated as a regulated investment company (“RIC”) under subchapter M of the Code and intends to continue to qualify for such treatment.

Each Fund uses the accrual method of accounting for tax and financial accounting purposes and uses a calendar year end for tax purposes. For the tax years ending after December 31, Year B, each Fund elected pursuant to § 4982(e)(4)(A) to use its tax year of December 31 in lieu of the 1-year period ending on October 31, for purposes of calculating the required distribution amount under
§ 4982(b)(1)(B) and § 4982(e)(2).

Each Fund assumed that the election under § 4982 would relieve the administrative burden associated with dual calculations of capital gain net income under the excise tax and subchapter M regimes. However, each Fund's experience is that the election created additional administrative complexities primarily due to time constraints in declaring required excise tax distributions.

The promulgation of regulations coordinating the excise tax and subchapter M provisions has greatly reduced the administrative burden of having a tax year different from the period used for determining the required distributions under § 4982. Accordingly, each Fund seeks consent to revoke its election to use its taxable year (the calendar year) for purposes of § 4982(b)(1)(B) and § 4982(e)(2).

Each Fund represents that:

1. The desire to revoke its § 4982(e)(4)(A) election is due to
   administrative and non-tax related financial burdens caused by the election.

2. It is not seeking to revoke its election for the purpose of
   preserving or securing a tax benefit.

3. It will neither benefit through hindsight nor prejudice the
   interests of the government as a result of being permitted to revoke its election.

4. It will not make a subsequent election under § 4982(e)(4)(A) for
   five calendar years following the year of the grant of revocation.

5. It did not have any foreign currency gains or losses for its most
   recent taxable year.

LAW and ANALYSIS

Section 4982(a) of the Code, which was enacted as part of the Tax Reform Act of 1986 and is effective for tax years beginning after December 31, 1986, imposes an excise tax on every RIC for each calendar year equal to 4 percent of the excess (if any) of the “required distribution” for the calendar year over the “distributed amount” for the calendar year.

Section 4982(b)(1) defines the term “required distribution” to mean, with respect to any calendar year, the sum of 98 percent of the RIC's ordinary income for such calendar year, plus 98 percent of its capital gain net income for the 1-year period ending on October 31 of such calendar year.

Section 4982(b)(2) provides that the amount determined under
§ 4982(b)(1) for any calendar year shall be increased by the excess (if any) of the “grossed up required distribution for the preceding calendar year,” over the distributed amount for such preceding year.

Section 4982(b)(3) defines “grossed up required distribution” for any calendar year to mean the required distribution for such year determined by applying § 4982(b)(2) to such year but substituting “100 percent” for each percentage set forth in § 4982(b)(1).

Section 4982(e)(4)(A) provides that if the tax year of a RIC ends with the month of November or December, the RIC may elect to have its capital gain net income for its tax year applied in lieu of the 1-year period ending on October 31 of the calendar year for purposes of satisfying the required distribution defined in
§ 4982(b)(1). Section 4982(e)(4)(B) provides that, once made, such election may be revoked only with the consent of the Secretary.

Based upon the information submitted and the representations made, we conclude that each Fund's desire to revoke its election under § 4982(e)(4)(A) is because of administrative burdens and not because of any federal tax-related financial burden caused by the election. Neither Fund seeks to revoke its election for the purpose of preserving or securing a federal tax benefit. Additionally, neither Fund will benefit through hindsight nor prejudice the interests of the government as a result of being permitted to revoke its election.

CONCLUSION

Accordingly, pursuant to § 4982(e)(4)(B), the Secretary consents to the revocation of the election made by each Fund under
§ 4982(e)(4)(A) effective for calendar Year A and subsequent years. In addition, in calculating the “required distribution” for calendar Year A, for purposes of § 4982(b)(1) and (2), the capital gain net income of each Fund will be determined on the basis of the capital gains and losses taken into account during the 10-month period from January 1, Year A, through October 31, Year A.

As a condition to the Secretary's consent to the revocation pursuant to § 4982(e)(4)(B), each Fund may not make a subsequent election under § 4982(e)(4)(A) for a period of 5 calendar years following the year to which the grant of revocation applies, that is Year C through Year D.

Except as specifically ruled upon above, no opinion is expressed or implied as to the federal excise or income tax consequences regarding each Fund.

It is important that a copy of this letter be attached to the federal income and excise tax return filed by each Fund for the first year to which this ruling applies. This ruling is directed only to the taxpayer who requested it. Section 6110(k)(3) of the Code provides that it may not be used or cited as precedent.

Sincerely,

Assistant Chief Counsel
(Financial Institutions and Products)

By: Alice M. Bennett
Chief, Branch 3

enclosures: Copy of letter for § 6110 purposes