PLR 9945050: Fund may revoke its excise tax distribution election

Plain-English summary

A regulated investment company had elected to use its December 31 tax year to measure capital gains for the § 4982 excise tax distribution requirement. It found that the election forced it to estimate November and December gains under a tight dividend deadline. The IRS consented to revocation after the fund represented that its reason was administrative and that it would gain no tax advantage from hindsight. For the transition year, the fund may calculate capital and foreign currency gains and losses over January through October. It cannot make the same election again for five calendar years following the revocation year.

Ruling snapshot

• Question: Could the fund revoke its § 4982(e)(4)(A) election and use a ten-month transition calculation?
• Outcome: Revocation approved, with a ten-month transition period and a five-year restriction on reelection.
• Key authorities: IRC §§ 4982(b), 4982(e)(4), 4982(e)(5).

Full text (IRS public release)

199945050

Internal Revenue Service Department of the Treasury

Index Number: 4982.00-00 Washington, DC 20224

Person to Contact:
Telephone Number:

Refer Reply To:
CC:DOM:FI&P:3/PLR-112861-99
Date: AUG 13 1999

LEGEND:
TY: 1999
Fund =
Year A =
Year B =
Year C =
Year D =
State X =

This is in reply to a letter dated July 8, 1999, seeking consent to revoke, for Year A and subsequent calendar years, a previous election made by the Fund under § 4892(e) (4) (A) of the Internal Revenue Code of 1986, as amended (the “Code”). Additionally, the Fund requests that the calculation of its required distribution of capital gain net income under
§ 4982(e) (2) and foreign currency gains and losses under
§ 4982(e) (5) 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 realized and recognized during the ten- month period from January 1, Year A, through October 31, Year A.

FACTS

The Fund is organized as a State X Business Trust and is registered with the Securities and Exchange Commission as a diversified open-end management investment company under the Investment Company Act of 1940, 15 U.S.C. § 80a-1 et seq. The Fund has elected to be treated as a regulated investment company (“RIC”) under subchapter M of the Code and intends to continue to qualify for such treatment.

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The Fund uses the accrual method of accounting for tax and financial accounting purposes and uses a calendar year end for tax purposes. For the tax years ending after December 31, Year B, the Fund elected pursuant to § 4982(e) (4) (A) to use its tax year of December 31 in lieu of the 1-year period ending on October 31, for purposes of calculating the required distribution amount under § 4982(b)(1)(B), § 4982(e) (2), and § 4982(e) (5).

The Fund assumed that the election under § 4982 would relieve the administrative burden associated with dual calculations of capital gain net income under the excise tax and subchapter M regimes. However, the Fund’s experience is that the election created additional administrative complexities primarily due to time constraints in declaring required excise tax distributions.

The time constraints requiring the Fund to declare dividends by December 31 impose a hardship on the Fund. The election under
§ 4982 requires the Fund to estimate its capital gains and losses for November and December in order to compute the required distribution for excise tax purposes. The use of a twelve-month period ending October 31 would enable the Fund to compute the required distribution without relying on estimates.

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 the required distribution under
§ 4982. Accordingly, the Fund seeks consent to revoke its election to use its taxable year (the calendar year) for purposes of § 4982(b) (1) (B), § 4982(e) (2), and § 4982(e) (5).

The Fund represents that:

1. The desire to revoke its § 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 a subsequent election under § 4982 (e) (4) (A)
   for five calendar years following the year of the grant of revocation.

PLR-112861-99 3 199945050

LAW and ANALYSIS

Section 4982(a) of the Code, 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” for the calendar year 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(b) (2) provides that the amount determined under
§ 4982(b) (1) for any calendar year shall be increased by the excess (if any) of the “grossed up required distribution for the preceding calendar year,” over the distributed amount for such preceding year.

Section 4982(b) (3) defines “grossed up required distribution” for any calendar year to mean the required distribution for such year determined by applying § 4982(b) (2) to such year but substituting “100 percent” for each percentage set forth in § 4982(b) (1).

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
§ 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 which is attributable to a § 988 transaction and which is properly taken into account for the portion of the calendar year after October 31 will not be taken into account in determining the amount of the ordinary income of the RIC for such calendar year but will be taken into account in determining the ordinary income of the RIC for the following calendar year. In the case of any company making an election under section 4982(e) (4), the preceding sentence shall be applied by substituting the last day of the company’s taxable year for October 31.

PLR-112861-99 4 199945050

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

CONCLUSION

Accordingly, pursuant to § 4982(e) (4) (B), the Secretary consents to the revocation of the election made by the Fund under
§ 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 § 4982(b) (1) and (2), the capital gain net income and foreign currency gains and losses of the Fund will be determined on the basis of the capital and foreign currency gains and losses taken into account 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 § 4982(e) (4) (B), the Fund may not make a subsequent election under § 4982(e) (4) (A) for a period of 5 calendar years following the year to which the grant of revocation applies, that is Year C through Year D.

Except as specifically ruled upon above, no opinion is expressed or implied as to the federal excise or income tax consequences regarding the Fund.

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It is important that a copy of this letter be attached to the federal income and excise tax return filed by the Fund for the first year to which this ruling applies. This ruling is directed only to the taxpayer who requested it. Section 6110(k) (3) of the Code provides that it may not be used or cited as precedent.

Sincerely,

Assistant Chief Counsel
(Financial Institutions and Products)

By:
Alice M. Bennett
Chief, Branch 3

enclosures: Copy of letter for § 6110 purposes