PLR 1114019: IRS consents to regulated investment companies revoking excise tax elections

Plain-English summary

The IRS consented to seven regulated investment companies revoking elections under IRC § 4982(e)(4)(A) that used their tax year instead of the one-year period ending October 31 to calculate required excise tax distributions. The funds represented that the elections created administrative burdens, not tax-related financial burdens, and that the revocation was not intended to preserve or secure a tax benefit. The IRS also approved calculating the required distribution for the specified year using gains and losses realized and recognized during the ten-month period from January 1 through October 31. The funds may not make another § 4982(e)(4)(A) election for five calendar years following the applicable revocation year. The ruling was based on the submitted facts and representations and did not address other federal excise or income tax consequences.

Ruling snapshot

• Question: Could the regulated investment companies revoke their § 4982(e)(4)(A) elections and calculate the required distribution using the January 1 through October 31 period?
• Outcome: Approved, revocation consented to with a five-year restriction on subsequent elections.
• Key authorities: IRC §§ 4982, 988, 1296, and 6110.

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201114019 Third Party Communication: None
Release Date: 4/8/2011 Date of Communication: Not Applicable
Index Number: 4982.00-00
Person To Contact:
------------------------------------ ------------------, ID No. -----------------
------------------------------------------------------------ Telephone Number:
---------------------- ---------------------
------------------------------------- Refer Reply To:
---------------------------------------- CC:FIP:B03
PLR-135170-10
Date:
December 21, 2010

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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Year A        =     -------

Year B        =     -------

PLR-135170-10 2

Year C = -------

Year D = -------

Year E = -------

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

   This ruling responds to a letter dated August 23, 2010, submitted on

behalf of Fund 1 to Fund 7 (collectively “the Funds”). The Funds request consent
to revoke, for tax Year A and subsequent calendar years, previous elections
made by the Funds under section 4982(e)(4)(A) of the Internal Revenue Code.
Additionally, the Funds request that the calculation of their 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

    The Funds are registered as investment companies under the Investment

Company Act of 1940, as amended, and each Fund 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. Each Fund is an open-end fund. Each
Fund’s taxable year ends on December 31.

   Between Year B and Year C, pursuant to section 4982(e)(4)(A), the Funds

elected to use their 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 Funds originally made their elections, they believed that

the elections under section 4982 would relieve the administrative burdens
associated with dual calculations of capital gains and losses under the excise tax
and Subchapter M provisions of the Code. However, the Funds’ experience has
been that the section 4982(e)(4)(A) elections have created additional
administrative complexities primarily due to time constraints in declaring required
excise tax distributions.

   Accordingly, each Fund seeks consent to revoke its election to use the

taxable year for purposes of sections 4982(b) and 4982(e). The Funds make the
following representations:

1. The desire to revoke the Funds’ section 4982(e)(4)(A) elections is due to

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   administrative and non-tax related financial burdens caused by the
   elections.

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

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

4. The Funds 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). 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.

   Section 4982(e)(6) provides that, for purposes of determining a RIC’s
   

   ordinary income (as defined in section 4982(e)(1)), section 1296 shall be applied
   as if the RIC’s taxable year ended on October 31, and any ordinary gain or loss
   from an actual disposition of stock in a passive foreign investment company

PLR-135170-10 4

during the portion of the calendar year after October 31 shall be taken into
account in determining the RIC’s ordinary income for 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 Funds’ desire to revoke their elections 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 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, foreign currency gains and losses, and gains and losses of the Funds
recognized under section 1296 will be determined on the basis of the capital
gains and losses, foreign currency gains and losses, and gains and losses
recognized under section 1296, if any, realized and recognized 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 Funds may not make subsequent elections 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 D through Year E).

   Except as specifically ruled upon above, no opinion is expressed or

implied as to any other federal excise or income tax consequences.

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  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 returns filed by 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: