PLR 200509014: Investment funds may revoke distribution calculation elections

Plain-English summary

Ten regulated investment companies had elected to use their November tax year end when measuring capital gains for the section 4982 distribution requirement. They sought consent to revoke those elections because the approach had created administrative burdens. The IRS consented, finding that the funds were not seeking a federal tax benefit and that revocation would not prejudice the government. For the transition calendar year, the funds would measure capital gains and foreign currency gains and losses over the eleven months ending October 31. As a condition of consent, none could make the same election again for five calendar years following the year of revocation.

Ruling snapshot

• Question: Could the funds revoke their elections to use a November tax year end for the section 4982 distribution calculation?
• Outcome: Approved, with an eleven month transition period and a five year bar on reelection.
• Key authorities: IRC §§ 4982(b)(1), 4982(e)(4), 4982(e)(5).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224
Number: 200509014
Third Party Communication: None
Release Date: 3/4/05
Date of Communication: Not Applicable
Index Number: 4982.00-00
Person To Contact:
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Telephone Number:
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Refer Reply To:
CC:FIP:B03
PLR-148765-04
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Date:
November 15, 2004

Legend:

Fund 1 = ----------------------------------------------------------------------------------------------------
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Fund 2 = ----------------------------------------------------------------------------------
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Fund 3 = ----------------------------------------------------------------------------------
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Fund 4 = ------------------------------------------------------------------------
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Fund 5 = --------------------------------------------------------------------
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Fund 6 = ----------------------------------------------------------------------------
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Fund 7 = ----------------------------------------------------------------------------------
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Fund 8 = ---------------------------------------------------------------
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Fund 9 = --------------------------------------------------------------------------
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Fund 10 = --------------------------------------------------------------------------------

Group = ----------------------------------------

Year A = -------

Year B = -------

Year C = -------

Year D = -------

State X = --------------------

Dear ------------------:

This ruling responds to a letter dated September 3, 2004, submitted on behalf of Funds 1 through 10 (collectively referred to as the “Funds”) by their authorized representatives. Each Fund requests consent to revoke, for tax Year B and subsequent calendar years, a previous election made by that Fund under section 4982(e)(4)(A) of the Internal Revenue Code. Additionally, the Funds request that the calculation of each of their required distributions of capital gain net income under section 4982(b)(1) and (e)(2) for the calendar year ending December 31, Year B, be determined on the basis of capital gains and losses and foreign currency gains and losses, if any, realized and recognized during the eleven-month period from December 1, Year A, through October 31, Year B

The Funds are all managed by Group. Funds 1, 2, 3, 4, 5, 6, and 7 are closed- end management investment companies, registered under the Investment Company Act of 1940 and organized as State X business trusts. Funds 8, 9, and 10 are open-end management investment companies, registered under the 1940 Act and organized as State X business trusts. Each Fund has elected to be regulated investment company (a “RIC”) for federal income tax purposes under section 851 of the Code.

The Funds use an accrual method of accounting for tax and financial accounting purposes, and each Fund’s taxable year ends on November 30. Pursuant to section 4982(e)(4)(A), each of the Funds elected to use its tax year ending on November 30 in lieu of the 1-year period ending on October 31, for purposes of calculating the required distribution under sections 4982(b)(1)(B), 4982(e)(2), and 4982(e)(5).

At the time the Funds originally made their respective elections, each believed that the election under section 4982 would relieve the administrative burdens associated with dual calculations of capital gains and losses under the excise tax and

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Subchapter M provisions of the Code. However, the Funds’ experience has been that the section 4982(e)(4)(A) election has created additional administrative complexities primarily due to time constraints in declaring required excise tax distributions.

Moreover, 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 section 4982. Accordingly, the Funds seek consent to revoke their elections to use the taxable year for purposes of sections 4982(b)(1)(B) and 4982(e)(2).

Permitting the Funds to revoke their section 4982(e)(4)(A) elections and compute capital gain net income for the tax year on October 31, rather than November 30, would significantly lessen the administrative burden of computing capital gain net income in an accurate and timely manner. Additionally, the Funds represent that:

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

2. They are not seeking to revoke their elections for the purpose of preserving or
   securing a tax benefit.

3. They will neither benefit through hindsight nor prejudice the interests of the
   government as a result of being permitted to revoke their elections.

4. They will not make any subsequent elections under section 4982(e)(4)(A)
   for five (5) calendar years following the year of the grant of revocation.

                      LAW AND ANALYSIS
   
   Section 4982(a), 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” 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(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 section 4982(b)(1).

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Section 4982(e)(4)(B) provides that, once made, such election may be revoked only with the consent of the Secretary.

Section 4982(e)(5) provides that any foreign currency gain or loss attributable to a section 988 transaction and which is properly taken into account for the portion of the calendar year after October 31 shall not be taken into account in determining the ordinary income of the RIC for the calendar year but shall be taken into account in determining the RIC’s ordinary income in the following calendar year. However, if a RIC has made an election under section 4982(e)(4), the preceding sentence shall be applied by substituting the last day of the RIC’s taxable year for October 31.

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

CONCLUSION

Accordingly, based upon the representations made and pursuant to section 4982(e)(4)(B), the Secretary consents to the revocation of the elections made by the Funds under section 4982(e)(4)(A), effective for calendar Year B and subsequent years. In addition, in calculating the “required distribution” for calendar Year B, for purposes of section 4982(b)(1) and (e), the capital gain net income and foreign currency gains and losses of the Funds will be determined on the basis of the capital gains and losses, and foreign currency gains and losses, if any, recognized and realized during the 11-month period from December 1, Year A, through October 31, Year B.

As a condition to the Secretary’s consent to the revocation pursuant to section 4982(e)(4)(B), none of the Funds may make a subsequent election under section 4982(e)(4)(A) for a period of five (5) calendar years following the year to which the grant of revocation applies (i.e. Year C through Year D).

Except as specifically ruled upon above, no opinion is expressed or implied as to any other federal excise or income tax consequences.

This ruling is directed only to the taxpayers requesting it. Section 6110(k)(3) provides that it may not be used or cited as precedent.

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It is important that a copy of this letter be attached to the federal income and excise tax return filed by each of the Funds for the year to which this ruling applies.

Sincerely yours,

________
Alice M. Bennett
Chief, Branch 3
Office of Associate Chief Counsel
(Financial Institutions and Products)

Enclosures:
Copy of this letter
Copy for ' 6110 purposes

cc: