Fund may revoke its section 4982 election after changing tax years

Plain-English summary

A regulated investment fund planned to change its tax year from November 30 to March 31 after a reorganization. Because a section 4982(e)(4)(A) election is available only to funds with November or December year ends, the existing election would no longer provide its intended administrative benefits. The IRS consented to revocation because the request arose from administrative burdens, did not seek a tax benefit, did not use hindsight, and would not prejudice the government. For the transition calendar year, capital gain net income would be measured over the eleven months from December 1 through October 31, and the calendar year ending December 31 would be the first year without the election for specified section 852 calculations. The fund could not make another section 4982 election for five calendar years.

Ruling snapshot

• Question: Could the fund revoke its section 4982 election when changing from a November 30 tax year to a March 31 tax year?
• Outcome: approved, with transitional calculation rules and a five-year bar on a new election
• Key authorities: IRC §§ 852 and 4982

Full text (IRS public release)

Internal Revenue Service Department of the Treasury
Washington, DC 20224

Number: 201709017 Third Party Communication: None
Release Date: 3/3/2017 Date of Communication: Not Applicable
Index Number: 4982.06-00, 4982.00-00,
4982.05-00 Person To Contact:
---------------------------, ID No. ---------------
---------------------- -----------------
------------------------------------------------------------ Telephone Number:
----------------------------------------------- ----------------------
--------------------------- Refer Reply To:
--------------- CC:FIP:B02
---------------------------- PLR-123790-16
Date:
December 02, 2016

Legend

Fund = ---------------------------------------------------------------------------------
----------------------------------------------------

Trust = --------------------------------

State = -----------------------

Year 1 = -------

Year 2 = -------

Year 3 = -------

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

  This responds to a letter dated August 1, 2016, submitted on behalf of Fund.

Fund requests consent to revoke a previous election made by Fund under section
4982(e)(4)(A) of the Internal Revenue Code (“Code”), for Year 3 and subsequent years.

                                                 FACTS

   Fund is a diversified series of Trust organized under the laws of State. Fund is

registered with the Securities and Exchange Commission as a diversified open-end
investment company under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et
seq., as amended. Each series of Trust, including the Fund, has made an election
under section 851(a) to be treated as a regulated investment company (“RIC) for federal
income tax purposes under Subtitle A, Chapter 1, Subchapter M of the Code. Each
PLR-123790-16 2

series of Trust is treated as a separate corporation for federal income tax purposes.
The overall method of accounting for each series is an accrual method and the taxable
year end for each series is March 31.

    Fund maintained its books based on a November 30 year end for tax years up to

and including November 30, Year 2. Following a recent reorganization, Fund qualifies
for an automatic change in taxable year-end and intends to change its tax year to a
fiscal year ending March 31.

   In Year 1, Fund separately elected under section 4982(e)(4)(A) to use its taxable

year ending on November 30 in lieu of the one-year period ending on October 31 for the
purposes of calculating the required distribution under sections 4982(b)(1) and (e) in
order to avoid payment of an excise tax under section 4982(a).

   Fund represents that the election under section 4982(e)(4)(A) was made in an

attempt to simplify the computation of required distributions of capital gain net income
by performing those computations to be consistent with its fiscal year tax returns. At the
time of the election it was believed that the election would minimize the complexity of
tax accounting and enhance the accuracy of the related excise tax distribution
calculations.

   The other RICs for which Fund’s administrator performs services maintain their

books and compute their taxable income based on a March 31 year end. The Fund
believes that a change in the year end of the Fund to March 31 will relieve some
administrative and financial burdens. Fund recognizes that the section 4982(e)(4)(A)
election is only available to a RIC that has a tax year ending November 30 or December
31, therefore Fund will not be eligible to have an election under section 4982(e)(4)(A)
after Fund changes its year ending to March 31. Additionally, Fund represents that the
benefits of the section 4982(e)(4)(A) election, including the minimization of tax
accounting complexity and the enhancement of the accuracy of the related distribution
calculations, will be completely eliminated by the change in year end.

   Accordingly, Fund seeks consent to revoke its election under section

4982(e)(4)(A) to use the taxable year for purposes of calculating its required distribution
for purposes of sections 4982(b) and 4982(e). Fund makes the following
representations:

   1. Fund’s desire to revoke its election is due to administrative and non-tax
   related financial burdens caused by the election;

   2. Fund is not seeking to revoke its election in order to preserve or secure
   a tax benefit;

PLR-123790-16 3

   3. Fund will neither benefit through hindsight, nor prejudice the interest of
   the government if permitted to revoke its election; and

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

                                LAW & ANALYSIS

    Section 4982(a) 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 (A) 98 percent of the RIC’s ordinary income for such
calendar year (as defined in section 4982(e)(1)), plus (B) 98.2 percent of its capital gain
net income for the one-year period ending on October 31 of such calendar year.

  Section 4982(e)(4)(A) provides that if the taxable year of a RIC ends with the

month of November or December, the RIC may elect to have its taxable year taken into
account in lieu of the one-year period ending on October 31 of the calendar year for
purposes of satisfying the required distribution defined in section 4982(b)(1)(B). 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)(A) provides that any specified gain or specified loss which

would be properly taken into account for the portion of the calendar year after October
31 shall be treated as arising on January 1 of the following calendar year. Section
4982(e)(5)(B) defines “specified gain” and “specified loss” as ordinary gain or loss from
the sale, exchange, or other disposition of property (including the termination of a
position with respect to such property). The terms include any foreign currency gain or
loss attributable to a section 988 transaction and any amount includible in gross income
under section 1296(a)(1), in the case of gain, or allowable as a deduction under section
1296(a)(2), in the case of loss. Section 4982(e)(5)(C) provides that if a RIC makes an
election under section 4982(e)(4), the last day of the RIC’s taxable year will be
substituted for October 31.

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

ordinary income, each specified mark-to-market provision shall be applied as if such
RIC’s taxable year ended on October 31. Section 4982(e)(6)(A) also provides that in
the case of a RIC making 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)(B) defines “specified mark to market provision” as sections 1256 and
1296 and any other provision of the Code (or regulations thereunder) which treats
PLR-123790-16 4

property as disposed of on the last day of the taxable year or which determines income
by reference to the value of an item on the last day of the taxable year.

   Sections 4982(b)(1)(B) and 4982(e) provide that a RIC with a calendar year that

does not have a section 4982(e)(4)(a) election in effect will compute capital gain net
income for a one-year period ending on October 31. For a RIC that is revoking its
election under section 4982(e)(4)(A), there is a possible inference that, for the first year
following the revocation, such RIC’s calculation of its capital gain net income will include
the November-December period twice, once as part of the preceding calendar year and
then again as part of the one-year period calculation for the year of change. To clarify
that such a double inclusion is not required, Fund has requested that the calculation of
its required distribution with respect to capital gain net income for the transitional year
be determined on the basis of capital gain net income recognized during the eleven-
month period from December 1, Year 2 through October 31 of Year 3.

   For purposes of determining the amount that a RIC may designate as a capital

gain dividend for a tax year, section 852(b)(3) and section 1.852-11(e) of the Treasury
regulations provided special rules that exclude post-October losses from the
computation. Section 852(b)(8) states that to the extent provided in the regulations, the
taxable income of a RIC (other than a company that has made a 4982(e)(4)(A) election)
shall be computed without regard to any specified late year losses attributable to
transactions arising after October 31 of such year, and any such specified late year loss
shall be treated as arising on the first day of the following tax year. Section 1.852-11(f)
provides that a RIC may elect, in accordance with procedures in section 1.852-11(i), to
compute its taxable income for a tax year without regard to part or all of any post-
October foreign currency loss for that year. Similarly, sections 852(c)(2) and 1.852-11(g)
provide that earnings and profits of a RIC for a tax year are determined without regard
to any post-October capital loss or post-October foreign currency loss for that year.
However, section 1.852-11(b) provides that the regulations under section 1.852-11 shall
only apply to a taxable year for which an election under section 4982(e)(4)(A) does not
apply. Consequently, for purposes of the aforementioned rules, it is necessary to
determine the first tax year for which the election under section 4982(e)(4)(A) will not
apply.

                                  CONCLUSION

   Based upon the information submitted and the representations made, we

conclude that Fund’s desire to revoke its election 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. Fund does not seek to revoke its election for the
purpose of preserving or securing a federal tax benefit. Additionally, Fund will neither
benefit through hindsight nor prejudice the interests of the government as a result of
being permitted to revoke its elections.
PLR-123790-16 5

Accordingly, it is held as follows:

   1. Pursuant to section 4982(e)(4)(B), the Secretary consents to the revocation of

the election made by Fund under section 4982(e)(4)(A), effective for the calendar year
Year 3 and subsequent years.

   2. In addition, in calculating Fund’s required distribution for calendar year Year 3,

for purposes of sections 4982(b)(1) and (e)(2), the capital gain net income will be
determined on the basis of the capital gains and losses realized and recognized during
the eleven-month period from December 1, Year 2 through October 31, Year 3.

   3. Calendar year ending December 31, Year 3 shall be considered the first

taxable year in which the election under section 4982(e)(4)(A) will not apply for
purposes of designating its capital gain dividends, for determining its post-October
losses, and for determining its earnings and profits.

   As a condition to the Secretary’s consent to the revocation pursuant to section

4982(e)(4)(B), Fund 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 Fund qualifies as a RIC.

  This ruling is directed only to the taxpayer requesting it. Section 6110(k)(3)

provides that it may not be used or cited as precedent.

     In accordance with the power of attorney on file with this office, a copy of this

letter is being sent to your authorized representatives. A copy of this letter must be
attached to any federal income or excise tax returns file by Fund for the year to which
this ruling applies.

                                   Sincerely,

                                   Susan Thompson Baker
                                   Susan Thompson Baker
                                   Senior Technician Reviewer, Branch 2
                                   Office of Associate Chief Counsel
                                   (Financial Institutions & Products)