Regulated investment company may revoke its section 4982 election

Plain-English summary

A regulated investment company had elected to use its calendar taxable year instead of the one-year period ending October 31 when computing capital gain net income for the section 4982 excise tax. It expected the election to simplify its calculations, but the election instead created administrative problems because of the time needed to declare sufficient dividends. The fund represented that its request was driven by administrative and financial burdens, not a tax benefit, and that revocation would neither use hindsight nor prejudice the government. The IRS consented to revocation for the requested year and later years. As a condition, the fund could not make the election again for five calendar years.

Ruling snapshot

• Question: May the regulated investment company revoke its election to use its taxable year for the section 4982 capital-gain calculation?
• Outcome: approved, with a five-year bar on making the election again
• Key authorities: IRC § 4982(b), (e)(4)-(6)

Full text (IRS public release)

Internal Revenue Service                                     Department of the Treasury
                                                             Washington, DC 20224

Number: 201934004                                            Third Party Communication: None
Release Date: 8/23/2019                                      Date of Communication: Not Applicable
Index Number: 4982.00-00, 4982.05-00,
              4982.06-00                                     Person To Contact:
                                                             -------------------,
----------------------                                       ID No. ----------------
-----------------------                                      Telephone Number:
------------------                                           --------------------
-----------------------------------                          Refer Reply To:
                                                             CC:FIP:B01
                                                             PLR-132639-18
                                                             Date:
                                                             May 24, 2019


Legend

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

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

Year 1       = ------

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

      This responds to a letter dated October 25, 2018, submitted on behalf of Fund.
Fund requests consent to revoke, for Year 1 and subsequent years, an election made
by Fund under section 4982(e)(4) of the Internal Revenue Code (“Code”).

                                                   FACTS

       Fund is a common law trust organized under the laws of State. Fund is registered
with the Securities and Exchange Commission as a non-diversified open-end
management investment company under the Investment Company Act of 1940, 15
U.S.C. 80a-1 et seq., as amended. Fund has made an election under section 851 of the
Code to be a regulated investment company (“RIC”). Fund’s overall method of
accounting is an accrual method and its taxable year is the calendar year.

       Fund has previously elected under section 4982(e)(4) to compute its capital gain
net income for purposes of section 4982(b)(1)(B) and (e)(2) using its taxable year in lieu
of the one-year period ending October 31 of the calendar year.

     At the time Fund originally made the election under section 4982(e)(4), Fund
assumed that the election would relieve the administrative burden associated with
separate calculations for excise tax and income tax purposes of Fund’s capital gain net
income, mark-to-market gains and losses, and specified gains and losses (or the
predecessor foreign currency gains and losses and section 1296 gains and losses).
However, Fund’s experience has been that the election has created additional
administrative complexities primarily due to time constraints in declaring dividends at
least equal to the required distribution under section 4982.

      Accordingly, Fund seeks consent to revoke its election under section 4982(e)(4).
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;

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

    4. Fund will not make a subsequent election under section 4982(e)(4) for at least
      five calendar years following Year 1.

                                  LAW AND ANALYSIS

       Section 4982(a) imposes an excise tax on every RIC (subject to certain
exceptions) 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 such election, once made, may be revoked only with the
consent of the Secretary.

      Section 4982(e)(5)(A) provides that any specified gain or specified loss that
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) or allowable as a deduction under section 1296(a)(2). Section
4982(e)(5)(C) provides that, if a RIC makes an election under section 4982(e)(4),
section 4982(e)(5)(A) applies by substituting the last day of the RIC’s taxable year 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) that treats
property as disposed of on the last day of the taxable year or that determines income by
reference to the value of an item on the last day of the taxable year.

        If a calendar year RIC revokes an election under section 4982(e)(4), the months
of November and December of the last calendar year to which the election applies are
part of both (a) that calendar year and (b) the one-year period ending on October 31 of
the first calendar year to which the election does not apply. If capital gains and losses
arising in those two months were included for two calendar years, however, section
4982 would not function as intended.

                                     CONCLUSION

        Based on the information submitted and the representations made, pursuant to
section 4982(e)(4)(B), the Secretary consents to the revocation, for Year 1 and
subsequent years, of the election made by Fund under section 4982(e)(4). In addition,
for purposes of section 4982(b)(1)(B) and (e)(2), Fund’s capital gain net income for Year
1 will be determined for the period beginning on January 1, Year 1, and ending on
October 31, Year 1.

       As a condition to 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) for a
period of 5 calendar years following Year 1.

       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 that requested it. Section 6110(k)(3) of
the Code provides that it may not be used or cited as precedent.

       In accordance with the power of attorney on file in this office, a copy of this letter
is being sent to your authorized representative. A copy of this letter must be attached to
any federal income or excise tax returns filed by Fund for the year to which this ruling
applies.



                                       Sincerely,



                                       _________________________
                                       Steven Harrison
                                       Branch Chief, Branch 1
                                       Office of Associate Chief Counsel
                                       (Financial Institutions and Products)