PLR 200915014: Two regulated investment companies could revoke excise-tax accounting elections

Plain-English summary

Two regulated investment companies asked to revoke elections that used their calendar tax years to measure capital gain net income and related foreign-currency items for the section 4982 excise tax. They said the elections had increased administrative complexity and that the revocations were not sought for a tax benefit. The IRS consented under section 4982(e)(4)(B), effective for the represented year and later years. The companies instead had to use the January 1 through October 31 measurement period described in the ruling, and neither company could make the election again for five calendar years after the revocation year.

Ruling snapshot

• Question: Could two regulated investment companies revoke their section 4982(e)(4)(A) elections to use their taxable years for excise-tax calculations?
• Outcome: Approved: the IRS consented to revocation, subject to a five-year bar on making another election.
• Key authorities: IRC §§ 988, 1296, and 4982.

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 200915014
Third Party Communication: None
Release Date: 4/10/2009
Date of Communication: Not Applicable
Index Number: 4982.00-00, 4982.05-00,
4982.05-01
Person To Contact:
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Telephone Number:
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Refer Reply To:
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CC:FIP:B02
PLR-133239-08
Date:
December 30, 2008

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

Date 1 = -------------------

Date 2 = ------------------

Year = -------

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

This is in reply to a letter dated July 18, 2008, requesting the revocation of the election under section 4982(e)(4)(A) of the Internal Revenue Code.

FACTS

X and Y are funds organized under the laws of State and registered with the Securities and Exchange Commission as diversified open-end management companies under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq. X and Y have

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elected to be treated as regulated investment companies (“RICs”) for purposes of Subtitle A, Chapter 1, Subchapter M of the Code.

X and Y use the accrual method of accounting for tax and financial accounting purposes, and use the calendar year for tax and financial reporting purposes.

On Date 1 and Date 2, respectively, X and Y elected under section 4982(e)(4)(A) of the Code to use the twelve-month period ending December 31 for purposes of calculating the required distribution of capital gain net income under section 4982(b)(1)(B) to avoid payment of an excise tax under section 4982(a). This period was also used to determine the treatment of foreign currency gains and losses pursuant to section 4982(e)(5).

X and Y assumed that the election under section 4982 would relieve the administrative burden associated with dual calculations of capital gain net income, foreign currency gains and losses, and gains and losses pursuant to section 1296 under the excise tax and subchapter M provisions of the Code. However, X and Y’s 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. Furthermore, 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 its required distribution under section 4982.

Accordingly, X and Y seek consent to revoke their elections under section 4982(e)(4)(A) to use their taxable years for purposes of sections 4982(b) and 4982(e).

X and Y represent that:

1. Their desire to revoke their elections is due to administrative and non-tax- related financial burdens caused by the elections;

2. They are not seeking to revoke their elections in order to preserve or secure a tax benefit;

3. They will neither benefit through hindsight, nor prejudice the interests of the government if permitted to revoke their elections; and

4. They will not make a subsequent election under section 4982(e)(4)(A) of the Code for at least five calendar years following the year of the grant of revocation.

APPLICABLE LAW

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Section 4982(a) of the Code imposes an excise tax on every RIC for each calendar year equal to 4 percent of the excess of the “required distribution” for the calendar year over the “distributed amount” for the calendar year.

Section 4982(b)(1) defines “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 the capital gain net income for its taxable 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). 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.

ANALYSIS and CONCLUSION

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

Accordingly, it is held as follows:

1. Pursuant to section 4982(e)(4)(B), the Secretary consents to the revocation of the elections made by X and Y under section 4982(e)(4)(A) effective for Year and subsequent years.

2. X and Y’s calculation of their capital gain net income under section 4982(b)(1) and section 4982(e)(2) shall be determined on the basis of capital gains and losses and foreign currency gains and losses realized and recognized during the ten-month period from January 1 of Year through October 31 of Year.

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As a condition to the Secretary’s consent to the revocation pursuant to section 4982(e)(4)(B), X and Y may not make a subsequent election under section 4982(e)(4)(A) for a period of 5 calendar years following the year to which the grant of revocation applies.

Except as expressly provided herein, no opinion is expressed or implied concerning the tax consequences of any aspect of any transaction or item discussed or referenced in this letter, including whether X or Y qualifies as a RIC.

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

In accordance with your specific request and the Power of Attorney on file with this office, both the original and a copy of this letter are being sent to your first-named authorized representative, and a copy is being sent to your second-named authorized representative.

A copy of this letter must be attached to any income tax return to which it is relevant.

Sincerely,

Thomas M. Preston
Thomas M. Preston
Senior Counsel, Branch 2
Office of Associate Chief Counsel
(Financial Institutions & Products)