PLR 201019018: IRS consents to a regulated investment company's revocation of a distribution election

Plain-English summary

The IRS consented to a regulated investment company's revocation of an election under IRC § 4982(e)(4)(A) for a specified tax year and later calendar years. The election had allowed the company to use its tax year instead of the one-year period ending October 31 when calculating required distributions. The IRS also approved using capital gains and losses and foreign currency gains and losses recognized during the ten-month period ending October 31 for the specified year's required distribution calculation. As a condition, the company may not make a new election under section 4982(e)(4)(A) for five calendar years after the revocation year.

Ruling snapshot

• Question: Could the regulated investment company revoke its section 4982(e)(4)(A) election and use the October 31 calculation period for the specified year?
• Outcome: Approved
• Key authorities: IRC §§ 4982(a), 4982(b)(1), 4982(e), 4982(e)(4), 4982(e)(5), and 6110(k)(3).

Full text (IRS public release)

Internal Revenue Service
Department of the Treasury
Washington, DC 20224

Number: 201019018
Third Party Communication: None
Release Date: 5/14/2010
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:
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CC:FIP:B03
PLR-146354-09
Date:
February 12, 2010

Legend:

Portfolio = ---------------------------------------------------------------------

Year A = -------

Year B = -------

Year C = -------

Year D = -------

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

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

This ruling responds to a letter dated October 13, 2009, submitted on behalf of the Portfolio. The Portfolio requests consent to revoke, for tax Year A and subsequent calendar years, a previous election made by the Portfolio under section 4982(e)(4)(A) of the Internal Revenue Code. Additionally, the Portfolio requests that the calculation of its required distributions under sections 4982(b)(1) and 4982(e) for the calendar year ending December 31, Year A, be determined on the basis of capital gains and losses and foreign currency gains and losses, if any, realized and recognized during the ten-month period from January 1, Year A, through October 31, Year A.

FACTS

Portfolio is organized as a business trust under the laws of State X. It is registered with the Securities and Exchange Commission as an open-end, management investment company under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq. The Portfolio has elected to be treated as a regulated investment company (a “RIC”) for federal income tax purposes under part I of subchapter M of the Code.

The Portfolio uses an accrual method of accounting for tax and financial accounting purposes, and its taxable year ends on December 31. For calendar years through Year B, pursuant to section 4982(e)(4)(A), the Portfolio elected to use its tax year ending on December 31 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 Portfolio originally made its election, it believed that the election under section 4982 would relieve the administrative burdens associated with dual calculations of capital gains and losses and section 988 gains and losses under the excise tax and Subchapter M provisions of the Code. However, the Portfolio’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 provision has greatly reduced the administrative burden of having a tax year different from the period used for determining its required distributions under section 4982.

Accordingly, the Portfolio seeks consent to revoke its election to use the taxable year for purposes of sections 4982(b) and 4982(e). The Portfolio makes the following representations:

1. The desire to revoke its section 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 any subsequent election 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). 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 the Portfolio’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 Portfolio
does not seek to revoke its election for the purpose of preserving or securing a
federal tax benefit. Additionally, the Portfolio will neither benefit through
hindsight nor prejudice the interest of the government as a result of being
permitted to revoke its election.

                               CONCLUSION

   Accordingly, based upon the representations made and pursuant to
section 4982(e)(4)(B), the Secretary consents to the revocation of the election
made by the Portfolio under section 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 section 4982(b)(1) and (e), the capital gain net
income and foreign currency gains and losses of the Portfolio 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 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
section 4982(e)(4)(B), the Portfolio may not 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.

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


                                       Sincerely yours,


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

Enclosures:
Copy of this letter
Copy for ' 6110 purposes