PLR 9950010: Investment funds may revoke a distribution calculation election

Plain-English summary

Eight regulated investment company funds had elected to use their calendar tax years to calculate capital gains for the § 4982 excise tax distribution requirement. They said the election created administrative problems and asked to return to the standard October 31 measurement date. The IRS consented to revocation effective for the requested year and later years, finding that the request was driven by administrative burdens rather than a tax benefit. For the transition year, the funds would count capital and foreign currency gains and losses from January through October. Each fund was barred from making the same election again for five calendar years.

Ruling snapshot

• Question: Could the funds revoke their § 4982(e)(4)(A) election and use a ten-month transition calculation?
• Outcome: Approved, with a five-year bar on a new election.
• Key authorities: IRC §§ 4982(b), 4982(e)(4), 4982(e)(5).

Full text (IRS public release)

INTERNAL REVENUE SERVICE
Index Number: 4982.00-00
Number: 199950010
Release Date: 12/17/1999
CC:DOM:FI&P:2 PLR-109979-99
September 15, 1999
Re:

Trust =

Fund 1 =

Fund 2 =

Fund 3 =

Fund 4 =

Fund 5 =

Fund 6 =

Fund 7 =

Fund 8 =

Year a =

Year b =

Year c =

State =

Dear

This is in reply to a letter dated May 26, 1999, seeking consent to revoke, for Year a and subsequent calendar years, an election previously made by Funds 1, 2, 3, 4, 5, 6, 7, and 8 ("Funds") under section 4982(e)(4)(A) of the Internal Revenue

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Code. Additionally, Funds request that the calculation of their required distribution of capital gain net income under section 4982(e)(2) and foreign currency gains and losses under section 4982(e)(5) for the calendar year ending December 31, Year a, be determined on the basis of capital 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

Each Fund is a series of Trust, a business trust organized under the law of State. Trust is an open-end management investment company under the Investment Company Act of 1940, 15 U.S.C. 80a-1 et seq. Each Fund is treated as a separate corporation under section 851(h) of the Code and has elected to be treated as a regulated investment company ("RIC") under Subchapter M of the Code.

Each Fund uses the accrual method of accounting for tax and financial accounting purposes, and uses a calendar year for tax purposes. In calendar Year b Funds elected under section 4982(e)(4)(A) of the Code to use their taxable years (the calendar year) in lieu of the one-year period ending on October 31 for purposes of calculating the required distribution amount under section 4982(b)(1)(B) and 4982(e)(2). Each Fund’s taxable year has also been used in determining the treatment of foreign currency gains and losses under section 4982(e)(5).
Each Fund assumed that the election under section 4982 would relieve the administrative burden associated with dual calculations of capital gain net income and section 988 gain or loss under the excise tax and subchapter M provisions of the Code.

The Funds’ experience has been that the election has created additional administrative complexities primarily due to time constraints in declaring required excise tax distributions. Further, 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 its required distribution under section 4982. Accordingly, each Fund seeks consent to revoke its election to use its taxable year (the calendar year) for purposes of sections 4982(b)(1)(B), 4982(e)(2), and 4982(e)(5).

Each Fund represents that:

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

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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 the election; and

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

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 "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 the 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 which is 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 amount of the ordinary income of the RIC for such calendar year but shall be taken into account in determining the ordinary income of the investment company for the following calendar year. In the case of any company making an election under section 4982(e)(4), however, the preceding sentence shall be applied by substituting the last day of the company’s taxable year for October 31.

Based on the information submitted and the representations made, we conclude that each 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

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caused by the election. No Fund seeks to revoke its election for the purpose of preserving or securing a federal tax benefit. Additionally, the Funds 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 section 4982(e)(4)(B), the Secretary consents to the revocation of the election made by each Fund 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 sections 4982(b)(1) and 4982(b)(2), the capital gain net income and any foreign currency gains and losses of each 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 section 4982(e)(4)(B), each 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, that is, Year a through Year c.

Except as specifically ruled upon above, no opinion is expressed or implied as to the federal excise or income tax consequences regarding Funds.
This ruling is directed only to the taxpayers that requested it. Section 6110(k)(3) of the Code 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 each Fund for the first year to which this ruling applies.

In accordance with the terms of a power of attorney on file in this office, the original of this letter is being sent to you and copies are being sent to the taxpayer and the second-named representative on the power of attorney.

Sincerely yours,
Assistant Chief Counsel
(Financial Institutions & Products)
By:
William E. Coppersmith
Chief, Branch 2
Enclosure:
Copy for section 6110 purposes