§ 852. Taxation of regulated investment companies and their shareholders
(a)
Requirements applicable to regulated investment companies
The provisions of this part (other than subsection (c) of this section) shall not be applicable to a regulated investment company for a taxable year unless—
(1)
the deduction for dividends paid during the taxable year (as defined in section
561, but without regard to capital gain dividends) equals or exceeds the sum of—
(2)
either—
(A)
the provisions of this part applied to the investment company for all taxable years ending on or after November 8, 1983, or
(B)
as of the close of the taxable year, the investment company has no earnings and profits accumulated in any taxable year to which the provisions of this part (or the corresponding provisions of prior law) did not apply to it.
The Secretary may waive the requirements of paragraph (1) for any taxable year if the regulated investment company establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section
4982.
(b)
Method of taxation of companies and shareholders
(1)
Imposition of tax on regulated investment companies
There is hereby imposed for each taxable year upon the investment company taxable income of every regulated investment company a tax computed as provided in section
11, as though the investment company taxable income were the taxable income referred to in section
11. In the case of a regulated investment company which is a personal holding company (as defined in section
542) or which fails to comply for the taxable year with regulations prescribed by the Secretary for the purpose of ascertaining the actual ownership of its stock, such tax shall be computed at the highest rate of tax specified in section
11
(b).
(2)
Investment company taxable income
The investment company taxable income shall be the taxable income of the regulated investment company adjusted as follows:
(C)
The deductions for corporations provided in part VIII (except section
248) in subchapter B (section
241 and following, relating to the deduction for dividends received, etc.) shall not be allowed.
(D)
the [1] deduction for dividends paid (as defined in section
561) shall be allowed, but shall be computed without regard to capital gain dividends and exempt-interest dividends.
(E)
The taxable income shall be computed without regard to section
443
(b) (relating to computation of tax on change of annual accounting period).
(F)
The taxable income shall be computed without regard to section
454
(b) (relating to short-term obligations issued on a discount basis) if the company so elects in a manner prescribed by the Secretary.
(G)
There shall be deducted an amount equal to the tax imposed by subsections (d)(2) and (i) of section
851 for the taxable year.
(3)
Capital gains
(A)
Imposition of tax
There is hereby imposed for each taxable year in the case of every regulated investment company a tax, determined as provided in section
1201
(a), on the excess, if any, of the net capital gain over the deduction for dividends paid (as defined in section
561) determined with reference to capital gain dividends only.
(B)
Treatment of capital gain dividends by shareholders
A capital gain dividend shall be treated by the shareholders as a gain from the sale or exchange of a capital asset held for more than 1 year.
(C)
Definition of capital gain dividend
For purposes of this part—
(i)
In general
Except as provided in clause (ii), a capital gain dividend is any dividend, or part thereof, which is reported by the company as a capital gain dividend in written statements furnished to its shareholders.
(ii)
Excess reported amounts
If the aggregate reported amount with respect to the company for any taxable year exceeds the net capital gain of the company for such taxable year, a capital gain dividend is the excess of—
(iii)
Allocation of excess reported amount
(I)
In general
Except as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported capital gain dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported capital gain dividend amount bears to the aggregate reported amount.
(II)
Special rule for noncalendar year taxpayers
In the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting “post-December reported amount” for “aggregate reported amount” and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year.
(iv)
Definitions
For purposes of this subparagraph—
(I)
Reported capital gain dividend amount
The term “reported capital gain dividend amount” means the amount reported to its shareholders under clause (i) as a capital gain dividend.
(II)
Excess reported amount
The term “excess reported amount” means the excess of the aggregate reported amount over the net capital gain of the company for the taxable year.
(III)
Aggregate reported amount
The term “aggregate reported amount” means the aggregate amount of dividends reported by the company under clause (i) as capital gain dividends for the taxable year (including capital gain dividends paid after the close of the taxable year described in section
855).
(v)
Adjustment for determinations
If there is an increase in the excess described in subparagraph (A) for the taxable year which results from a determination (as defined in section
860
(e)), the company may, subject to the limitations of this subparagraph, increase the amount of capital gain dividends reported under clause (i).
(D)
Treatment by shareholders of undistributed capital gains
(i)
Every shareholder of a regulated investment company at the close of the company’s taxable year shall include, in computing his long-term capital gains in his return for his taxable year in which the last day of the company’s taxable year falls, such amount as the company shall designate in respect of such shares in a written notice mailed to its shareholders at any time prior to the expiration of 60 days after close of its taxable year, but the amount so includible by any shareholder shall not exceed that part of the amount subjected to tax in subparagraph (A) which he would have received if all of such amount had been distributed as capital gain dividends by the company to the holders of such shares at the close of its taxable year.
(ii)
For purposes of this title, every such shareholder shall be deemed to have paid, for his taxable year under clause (i), the tax imposed by subparagraph (A) on the amounts required by this subparagraph to be included in respect of such shares in computing his long-term capital gains for that year; and such shareholder shall be allowed credit or refund, as the case may be, for the tax so deemed to have been paid by him.
(iii)
The adjusted basis of such shares in the hands of the shareholder shall be increased, with respect to the amounts required by this subparagraph to be included in computing his long-term capital gains, by the difference between the amount of such includible gains and the tax deemed paid by such shareholder in respect of such shares under clause (ii).
(E)
Certain distributions
In the case of a distribution to which section
897 does not apply by reason of the second sentence of section
897
(h)(1), the amount of such distribution which would be included in computing long-term capital gains for the shareholder under subparagraph (B) or (D) (without regard to this subparagraph)—
(4)
Loss on sale or exchange of stock held 6 months or less
(A)
Loss attributable to capital gain dividend
If—
(i)
subparagraph (B) or (D) of paragraph (3) provides that any amount with respect to any share is to be treated as long-term capital gain, and
then any loss (to the extent not disallowed under subparagraph (B)) on the sale or exchange of such share shall, to the extent of the amount described in clause (i), be treated as a long-term capital loss.
(B)
Loss attributable to exempt-interest dividend
If—
(i)
a shareholder of a regulated investment company receives an exempt-interest dividend with respect to any share, and
then any loss on the sale or exchange of such share shall, to the extent of the amount of such exempt-interest dividend, be disallowed.
(C)
Determination of holding periods
For purposes of this paragraph, in determining the period for which the taxpayer has held any share of stock—
(D)
Losses incurred under a periodic liquidation plan
To the extent provided in regulations, subparagraphs (A) and (B) shall not apply to losses incurred on the sale or exchange of shares of stock in a regulated investment company pursuant to a plan which provides for the periodic liquidation of such shares.
(E)
Exception to holding period requirement for certain regularly declared exempt-interest dividends
(i)
Daily dividend companies
Except as otherwise provided by regulations, subparagraph (B) shall not apply with respect to a regular dividend paid by a regulated investment company which declares exempt-interest dividends on a daily basis in an amount equal to at least 90 percent of its net tax-exempt interest and distributes such dividends on a monthly or more frequent basis.
(ii)
Authority to shorten required holding period with respect to other companies
In the case of a regulated investment company (other than a company described in clause (i)) which regularly distributes at least 90 percent of its net tax-exempt interest, the Secretary may by regulations prescribe that subparagraph (B) (and subparagraph (C) to the extent it relates to subparagraph (B)) shall be applied on the basis of a holding period requirement shorter than 6 months; except that such shorter holding period requirement shall not be shorter than the greater of 31 days or the period between regular distributions of exempt-interest dividends.
(5)
Exempt-interest dividends
If, at the close of each quarter of its taxable year, at least 50 percent of the value (as defined in section 851(c)(4)) of the total assets of the regulated investment company consists of obligations described in section
103
(a), such company shall be qualified to pay exempt-interest dividends, as defined herein, to its shareholders.
(A)
Definition of exempt-interest dividend
(i)
In general
Except as provided in clause (ii), an exempt-interest dividend is any dividend or part thereof (other than a capital gain dividend) paid by a regulated investment company and reported by the company as an exempt-interest dividend in written statements furnished to its shareholders.
(ii)
Excess reported amounts
If the aggregate reported amount with respect to the company for any taxable year exceeds the exempt interest of the company for such taxable year, an exempt-interest dividend is the excess of—
(iii)
Allocation of excess reported amount
(I)
In general
Except as provided in subclause (II), the excess reported amount (if any) which is allocable to the reported exempt-interest dividend amount is that portion of the excess reported amount which bears the same ratio to the excess reported amount as the reported exempt-interest dividend amount bears to the aggregate reported amount.
(II)
Special rule for noncalendar year taxpayers
In the case of any taxable year which does not begin and end in the same calendar year, if the post-December reported amount equals or exceeds the excess reported amount for such taxable year, subclause (I) shall be applied by substituting “post-December reported amount” for “aggregate reported amount” and no excess reported amount shall be allocated to any dividend paid on or before December 31 of such taxable year.
(iv)
Definitions
For purposes of this subparagraph—
(I)
Reported exempt-interest dividend amount
The term “reported exempt-interest dividend amount” means the amount reported to its shareholders under clause (i) as an exempt-interest dividend.
(II)
Excess reported amount
The term “excess reported amount” means the excess of the aggregate reported amount over the exempt interest of the company for the taxable year.
(III)
Aggregate reported amount
The term “aggregate reported amount” means the aggregate amount of dividends reported by the company under clause (i) as exempt-interest dividends for the taxable year (including exempt-interest dividends paid after the close of the taxable year described in section
855).
(7)
Time certain dividends taken into account
For purposes of this title, any dividend declared by a regulated investment company in October, November, or December of any calendar year and payable to shareholders of record on a specified date in such a month shall be deemed—
(B)
to have been paid by such company on December 31 of such calendar year (or, if earlier, as provided in section
855).
The preceding sentence shall apply only if such dividend is actually paid by the company during January of the following calendar year.
(8)
Elective deferral of certain late-year losses
(A)
In general
Except as otherwise provided by the Secretary, a regulated investment company may elect for any taxable year to treat any portion of any qualified late-year loss for such taxable year as arising on the first day of the following taxable year for purposes of this title.
(B)
Qualified late-year loss
For purposes of this paragraph, the term “qualified late-year loss” means—
(C)
Post-October capital loss
For purposes of this paragraph, the term “post-October capital loss” means the greatest of—
(D)
Late-year ordinary loss
For purposes of this paragraph, the term “late-year ordinary loss” means the excess (if any) of—
(i)
the sum of—
(I)
the specified losses (as defined in section
4982
(e)(5)(B)(ii)) attributable to the portion of the taxable year after October 31, plus
(ii)
the sum of—
(I)
the specified gains (as defined in section
4982
(e)(5)(B)(i)) attributable to the portion of the taxable year after October 31, plus
(E)
Special rule for companies determining required capital gain distributions on taxable year basis
(9)
Dividends treated as received by company on ex-dividend date
For purposes of this title, if a regulated investment company is the holder of record of any share of stock on the record date for any dividend payable with respect to such stock, such dividend shall be included in gross income by such company as of the later of—
(c)
Earnings and profits
(1)
Treatment of nondeductible items
(A)
Net capital loss
If a regulated investment company has a net capital loss for any taxable year—
(B)
Other nondeductible items
(i)
In general
The earnings and profits of a regulated investment company for any taxable year (but not its accumulated earnings and profits) shall not be reduced by any amount which is not allowable as a deduction (other than by reason of section
265 or
171
(a)(2)) in computing its taxable income for such taxable year.
(2)
Coordination with tax on undistributed income
For purposes of applying this chapter to distributions made by a regulated investment company with respect to any calendar year, the earnings and profits of such company shall be determined without regard to any net capital loss attributable to the portion of the taxable year after October 31 and without regard to any late-year ordinary loss (as defined in subsection (b)(8)(D)). The preceding sentence shall apply—
(3)
Distributions to meet requirements of subsection (a)(2)(B)
Any distribution which is made in order to comply with the requirements of subsection (a)(2)(B)—
(A)
shall be treated for purposes of this subsection and subsection (a)(2)(B) as made from earnings and profits which, but for the distribution, would result in a failure to meet such requirements (and allocated to such earnings on a first-in, first-out basis), and
(B)
to the extent treated under subparagraph (A) as made from accumulated earnings and profits, shall not be treated as a distribution for purposes of subsection (b)(2)(D) and section
855.
(d)
Distributions in redemption of interests in unit investment trusts
In the case of a unit investment trust—
(1)
which is registered under the Investment Company Act of 1940 (15 U.S.C. 80a–1 and following) and issues periodic payment plan certificates (as defined in such Act), and
(e)
Procedures similar to deficiency dividend procedures made applicable
(1)
In general
If—
(A)
there is a determination that the provisions of this part do not apply to an investment company for any taxable year (hereinafter in this subsection referred to as the “non-RIC year”), and
(B)
such investment company meets the distribution requirements of paragraph (2) with respect to the non-RIC year,
for purposes of applying subsection (a)(2) to subsequent taxable years, the provisions of this part shall be treated as applying to such investment company for the non-RIC year. If the determination under subparagraph (A) is solely as a result of the failure to meet the requirements of subsection (a)(2), the preceding sentence shall also apply for purposes of applying subsection (a)(2) to the non-RIC year and the amount referred to in paragraph (2)(A)(i) shall be the portion of the accumulated earnings and profits which resulted in such failure.
(2)
Distribution requirements
(A)
In general
The distribution requirements of this paragraph are met with respect to any non-RIC year if, within the 90-day period beginning on the date of the determination (or within such longer period as the Secretary may permit), the investment company makes 1 or more qualified designated distributions and the amount of such distributions is not less than the excess of—
(3)
Interest charge
(A)
In general
If paragraph (1) applies to any non-RIC year of an investment company, such investment company shall pay interest at the underpayment rate established under section
6621—
(4)
Provision not to apply in the case of fraud
The provisions of this subsection shall not apply if the determination contains a finding that the failure to meet any requirement of this part was due to fraud with intent to evade tax.
(f)
Treatment of certain load charges
(1)
In general
If—
(A)
the taxpayer incurs a load charge in acquiring stock in a regulated investment company and, by reason of incurring such charge or making such acquisition, the taxpayer acquires a reinvestment right,
(B)
such stock is disposed of before the 91st day after the date on which such stock was acquired, and
(C)
the taxpayer acquires, during the period beginning on the date of the disposition referred to in subparagraph (B) and ending on January 31 of the calendar year following the calendar year that includes the date of such disposition, stock in such regulated investment company or in another regulated investment company and the otherwise applicable load charge is reduced by reason of the reinvestment right,
the load charge referred to in subparagraph (A) (to the extent it does not exceed the reduction referred to in subparagraph (C)) shall not be taken into account for purposes of determining the amount of gain or loss on the disposition referred to in subparagraph (B). To the extent such charge is not taken into account in determining the amount of such gain or loss, such charge shall be treated as incurred in connection with the acquisition referred to in subparagraph (C) (including for purposes of reapplying this paragraph).
(2)
Definitions and special rules
For purposes of this subsection—
(A)
Load charge
The term “load charge” means any sales or similar charge incurred by a person in acquiring stock of a regulated investment company. Such term does not include any charge incurred by reason of the reinvestment of a dividend.
(g)
Special rules for fund of funds
(1)
In general
In the case of a qualified fund of funds—
(A)
such fund shall be qualified to pay exempt-interest dividends to its shareholders without regard to whether such fund satisfies the requirements of the first sentence of subsection (b)(5), and
(B)
such fund may elect the application of section
853 (relating to foreign tax credit allowed to shareholders) without regard to the requirement of subsection (a)(1) thereof.
(2)
Qualified fund of funds
For purposes of this subsection, the term “qualified fund of funds” means a regulated investment company if (at the close of each quarter of the taxable year) at least 50 percent of the value of its total assets is represented by interests in other regulated investment companies.
[1] So in original. Probably should be capitalized.