General Instructions

Table of Contents

Purpose of Form

Use Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies, to report the income, gains, losses, deductions, credits, and to figure the income tax liability of a regulated investment company (RIC) as defined in section 851.

Who Must File

A domestic corporation that meets certain conditions (discussed below) must file Form 1120-RIC if it elects to be treated as a RIC for the tax year (or has made an election for a prior tax year and the election has not been terminated or revoked). The election is made by computing taxable income as a RIC on Form 1120-RIC.

General Requirements To Qualify as a RIC

The term “regulated investment company” applies to any domestic corporation that:

  • Is registered throughout the tax year as a management company or unit investment trust under the Investment Company Act of 1940 (ICA),

  • Has an election in effect under the ICA to be treated as a business development company, or

  • Is a common trust fund or similar fund that is neither an investment company under section 3(c)(3) of the ICA nor a common trust fund as defined under section 584(a).

Other Requirements

In addition, the RIC must meet the (1) income test, (2) asset test, and (3) distribution requirements explained below.

The income test:   At least 90% of its gross income must be derived from the following items:

  • Dividends;

  • Interest (including tax-exempt interest income);

  • Payments with respect to securities loans (as defined in section 512(a)(5));

  • Gains from the sale or other disposition of stock or securities (as defined in ICA section 2(a)(36)) or foreign currencies;

  • Other income (including gains from options, futures, or forward contracts) derived from the RIC's business of investing in such stock, securities, or currencies; and

  • Net income derived from an interest in a qualified publicly traded partnership (as defined in section 851(h)).

    Income from a partnership or trust qualifies under the 90% test to the extent the RIC's distributive share of such income is from items described above as realized by the partnership or trust.

    Income that a RIC receives in the normal course of business as a reimbursement from its investment advisor is qualifying income for purposes of the 90% test if the reimbursement is includible in the RIC's gross income.

    A RIC that fails to meet the requirements of section 851(b)(2) will still be considered to have satisfied the requirements of this test if:

    • Following the RIC's identification of the failure, a description of each item of its gross income described is set forth in a statement for the tax year.

    • Failure to meet the requirements of this test is due to reasonable cause and not due to willful neglect.

The asset test:   

  1. At the end of each quarter of the RIC's tax year, at least 50% of the value of its assets must be invested in the following items:

    • Cash and cash items (including receivables);

    • Government securities;

    • Securities of other RICs; and

    • Securities of other issuers, except that the investment in a single issuer of securities may not exceed 5% of the value of the RIC's assets or 10% of the outstanding voting securities of the issuer (except as provided in section 851(e)).

  2. At the end of each quarter of the RIC's tax year, no more than 25% of the value of the RIC's assets may be invested in the securities of:

    • A single issuer (excluding government securities or securities of other RICs);

    • Two or more issuers controlled by the RIC and engaged in the same or related trades or businesses; or

    • One or more qualified publicly traded partnerships as defined in section 851(h).

    See sections 851(b)(3) and 851(c) for further details.

  3. A RIC that fails to meet the requirements of section 851(b)(3) for a quarter shall be considered to have satisfied the requirements of this test if:

    • After the RIC identifies that it did not satisfy the asset test, the RIC must provide a description of each asset that causes the RIC to fail to satisfy the requirements at the close of the quarter.

    • The failure to meet the requirements of section 851(b)(3) is due to reasonable cause and not due to willful neglect.

    • The RIC disposes of the assets set forth on the statement within 6 months after the last day of the quarter that the RIC identified the failure.

  4. De minimis failures. A RIC that fails to meet the requirements of section 851(b)(3) for a quarter shall be considered to have satisfied the requirements of this test if:

    • Such failure is due to ownership of assets that the total value does not exceed:

      1. One percent of the total value of the RIC's assets at the end of the quarter for which the measurement is done, or

      2. $10,000,000, and

      3. The RIC disposes of the asset following the identification of the failure within 6 months after the last day of the quarter in which the RIC identified the failure.

Note.

For special rules regarding failure to meet the requirements of the income and asset tests, see section 851(d)(2).

Distribution requirements.   The RIC's deduction for dividends paid for the tax year (as defined in section 561, but without regard to capital gain dividends) equals or exceeds the sum of:

  • 90% of its investment company taxable income determined without regard to section 852(b)(2)(D); and

  • 90% of the excess of the RIC's interest income excludable from gross income under section 103(a) over its deductions disallowed under sections 265 and 171(a)(2).

  
A RIC that does not satisfy the distribution requirements will be subject to taxation as a C corporation.

Earnings and profits.

The RIC must either have been a RIC for all tax years ending after November 7, 1983, or, at the end of the current tax year, had no accumulated earnings and profits from any non-RIC tax year.

Note.

For this purpose, current year distributions are treated as made from the earliest earnings and profits accumulated in any non-RIC tax year. See section 852(c)(3). Also see section 852(e) for procedures that may allow the RIC to avoid disqualification for the initial year if the RIC did not meet this requirement.

Definition of a Fund

The term “fund” refers to a separate portfolio of assets, whose beneficial interests are owned by the holders of a class or series of stock of the RIC that is preferred over all other classes or series for that portfolio of assets.

When To File

Generally, a RIC must file its income tax return by the 15th day of the 3rd month after the end of its tax year. A new RIC filing a short period return must generally file by the 15th day of the 3rd month after the short period ends. A RIC that has dissolved must generally file by the 15th day of the 3rd month after the date of dissolution.

If the due date falls on a Saturday, Sunday, or legal holiday, the RIC may file its return on the next business day.

Private delivery services

RICs can use certain private delivery services designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns and payments.

These private delivery services include only the following.

  • DHL Express (DHL): DHL Same Day Service.

  • Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.

  • United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

For the IRS mailing address to use if you are using a private delivery service, go to IRS.gov and enter “private delivery service” in the search box.

The private delivery service can tell you how to get written proof of the mailing date.

Private delivery services cannot deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an IRS P.O. box address.

Extension of Time To File

File Form 7004, Application for Automatic Extension of Time To File Certain Business Income Tax, Information, and Other Returns, to request a 6-month extension of time to file. Generally, the corporation must file Form 7004 by the regular due date of the return.

Where To File

File the RIC's return at the applicable IRS address listed below.

If the RIC's principal business, office, or agency is located in: And the total assets at the end of the tax year (Form 1120-RIC, page 1, item D) are: Use the following address:
Connecticut, Delaware, District of Columbia, Florida, Georgia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Tennessee, Vermont, Virginia, West Virginia, Wisconsin Less than $10 million Department of the Treasury 
Internal Revenue Service Center 
Cincinnati, OH 45999-0012
$10 million or more Department of the Treasury 
Internal Revenue Service Center 
Ogden, UT 84201-0012
Alabama, Alaska, Arizona, Arkansas, California, Colorado, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Texas, Utah, Washington, Wyoming Any amount Department of the Treasury 
Internal Revenue Service Center 
Ogden, UT 84201-0012

A group of corporations with members located in more than one service center area will often keep all the books and records at the principal office of the managing corporation. In this case, file the tax returns with the service center for the area in which the principal office of the managing corporation is located.

Who Must Sign

The return must be signed and dated by:

  • The president, vice president, treasurer, assistant treasurer, chief accounting officer or

  • Any other corporate officer (such as tax officer) authorized to sign.

If a return is filed on behalf of a RIC by a receiver, trustee, or assignee, the fiduciary must sign the return, instead of the corporate officer. Returns and forms signed by a receiver or trustee in bankruptcy on behalf of a RIC must be accompanied by a copy of the order or instructions of the court authorizing signing of the return or form.

Note.

If this return is being filed for a series fund (as defined in section 851(g)(2)), the return may be signed by any officer authorized to sign for the RIC in which the fund is a series.

If an employee of the RIC completes Form 1120-RIC, the paid preparer's space should remain blank. A preparer who does not charge the RIC to prepare Form 1120-RIC should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill in the “Paid Preparer Use Only” section.

The paid preparer must complete the required preparer information and:

  • Sign the return in the space provided for the preparer's signature; and

  • Give a copy of the return to the corporation.

Note.

A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.

Paid Preparer Authorization

If the RIC wants to allow the IRS to discuss its 2012 tax return with the paid preparer who signed the return, check the “Yes” box in the signature area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer Use Only” section of the RIC's return. It does not apply to the firm, if any, shown in that section.

If the “Yes” box is checked, the RIC is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The RIC is also authorizing the paid preparer to:

  • Give the IRS any information that is missing from the return,

  • Call the IRS for information about the processing of the return or the status of any related refund or payment(s), and

  • Respond to certain IRS notices about math errors, offsets, and return preparation.

The RIC is not authorizing the paid preparer to receive any refund check, bind the RIC to anything (including any additional tax liability), or otherwise represent the RIC before the IRS.

The authorization will automatically end no later than the due date (excluding extensions) for filing the RIC's 2012 tax return. If the RIC wants to expand the paid preparer's authorization or revoke the authorization before it ends, see Pub. 947, Practice Before the IRS and Power of Attorney.

Assembling the Return

To ensure that the RIC's tax return is correctly processed, attach all schedules, statements, and other forms after page 4, Form 1120-RIC, in the following order.

  1. Schedule N (Form 1120).

  2. Schedule D (Form 1120).

  3. Schedule O (Form 1120).

  4. Form 4626.

  5. Form 4136.

  6. Additional schedules in alphabetical order.

  7. Additional forms in numerical order.

  8. Supporting statements and attachments.

Complete every applicable entry space on Form 1120-RIC. Do not enter “See attached” instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms.

If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Enter the RIC's name and EIN on each supporting statement or attachment.

Tax Payments

The RIC must pay the tax due in full no later than the 15th day of the 3rd month after the end of the tax year.

Electronic Deposit Requirement

RICs must use electronic funds transfer to make all federal tax deposits (such as deposits of employment, excise, and corporate income tax). Generally, electronic funds transfers are made using the Electronic Federal Tax Payment System (EFTPS). However, if the RIC does not want to use EFTPS, it can arrange for its tax professional, financial institution, payroll service, or other trusted third party to make deposits on its behalf. Also, it may arrange for its financial institution to initiate a same-day tax wire payment (discussed below) on its behalf. EFTPS is a free service provided by the Department of the Treasury. Services provided by a tax professional, financial institution, payroll service, or other third party may have a fee.

To get more information about EFTPS or to enroll in EFTPS, visit www.eftps.gov, or call 1-800-555-4477 (TTY/TDD 1-800-733-4829).

Depositing on time.   For deposits made by EFTPS to be on time, the RIC must initiate the deposit by 8 p.m. Eastern time the day before the date the deposit is due. If the RIC uses a third party to make deposits on its behalf, they may have different cutoff times.

Same-day payment option.   If the RIC fails to initiate a deposit transaction on EFTPS by 8 p.m. Eastern time on the day before the date a deposit is due, it can still make the deposit on time by using the Federal Tax Application (FTA). Before using the same-day payment option, the RIC will need to make arrangements with its financial institution ahead of time. Please check with the financial institution regarding availability, deadlines, and costs. To learn more about making a same-day payment and download the Same-Day Payment Worksheet, visit www.eftps.gov.

Estimated Tax Payments

Generally, the following rules apply to the RIC's payments of estimated tax.

  • The RIC must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more.

  • The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.

  • The RIC must use electronic funds transfer to make installment payments of estimated tax.

  • Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax. See the Instructions for Form 1120-W.

  • If the RIC overpaid its estimated tax, it may be able to get a quick refund by filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. The overpayment must be at least 10% of the RIC's expected income tax liability and at least $500.

For more information, including penalties, see the instructions for line 29, Estimated tax penalty, later.

Interest and Penalties

Interest.   Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Late filing of return.   A RIC that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $135. The penalty will not be imposed if the RIC can show that the failure to file on time was due to reasonable cause.

Late payment of tax.   A RIC that does not pay the tax when due generally may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the RIC can show that the failure to pay on time was due to reasonable cause.

Reasonable cause determinations.   If the RIC receives a notice about a penalty after it files its return, send the IRS an explanation and we will determine if the RIC meets the reasonable cause criteria. Do not attach an explanation when the RIC's return is filed.

Trust fund recovery penalty.   This penalty may apply if certain excise, income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on:

  • Form 720, Quarterly Federal Excise Tax Return;

  • Form 941, Employer's QUARTERLY Federal Tax Return;

  • Form 944, Employer's ANNUAL Federal Tax Return; or

  • Form 945, Annual Return of Withheld Federal Income Tax.

  The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to be responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the full amount of the unpaid trust fund tax. See the Instructions for Form 720 or Pub. 15 (Circular E), for details, including the definition of responsible persons.

Other penalties.   Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. See sections 6662, 6662A, and 6663.

Accounting Methods

Figure taxable income using the method of accounting regularly used in keeping the RIC's books and records. In all cases, the method used must clearly reflect taxable income.

Generally, permissible methods include:

  • Cash,

  • Accrual, or

  • Any other method authorized by the Internal Revenue Code.

Accrual method.   Generally, a RIC must use the accrual method of accounting if its average annual gross receipts exceed $5 million. See section 448(c).

  Under the accrual method, an amount is includible in income when:

  1. All the events have occurred that fix the right to receive the income, which is the earliest of the date:

    1. the required performance takes place,

    2. payment is due, or

    3. payment is received, and

  2. The amount can be determined with reasonable accuracy.

  See Regulations section 1.451-1(a) and Pub. 538, Accounting Periods and Methods, for details.

Mark-to-market accounting method.   Generally, dealers in securities must use the mark-to-market accounting method described in section 475. Under this method, any security that is inventory to the dealer must be held at its fair market value (FMV).

  Any security held by a dealer that is not inventory and held at the close of the tax year is treated as sold at its FMV on the last business day of the tax year. Any resulting gain or loss must be taken into account that year in determining gross income. The gain or loss taken into account is generally treated as ordinary gain or loss.

  For details, including exceptions, see section 475, the related regulations, and Rev. Rul. 97-39, 1997-39 I.R.B. 4.

  Dealers in commodities and traders in securities and commodities may elect, with some exceptions, to use the mark-to-market accounting method. To make the election, the RIC must file a statement describing the election, the first tax year the election is to be effective, and in the case of an election for traders in securities or commodities, the trade or business for which the election is made. Except for new taxpayers, the statement must be filed by the due date (not including extensions) of the income tax return for the tax year immediately preceding the election year and attached to that return, or if applicable, to a request for an extension of time to file that return. For more details, see Rev. Proc. 99-17, 1999-7 I.R.B. 52, and sections 475(e) and (f).

Change in accounting method.   Generally, the RIC must get IRS consent to change the method of accounting used to report taxable income (for income as a whole or for the treatment of any material item). To do so, the RIC must file Form 3115, Application for Change in Accounting Method. See Form 3115 and Pub. 538 for more information.

  There are some instances when the RIC can obtain automatic consent from the IRS to change to certain accounting methods. See Rev. Proc. 2011-14, 2011-4 I.R.B. 330, as modified and clarified by Rev. Proc. 2012-19, 2012-14 I.R.B. 689, and Rev. Proc. 2012-20, 2012-14 I.R.B. 700, or any successor. Also, see the Instructions for Form 3115.

Accounting Periods

A RIC must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a RIC uses to keep its records and report its income and expenses. RICs can use a calendar year or a fiscal year. For more information about accounting periods, see Regulations sections 1.441-1 and 1.441-2.

Change of tax year.   Generally, a RIC must receive consent from the IRS before changing its tax year. To obtain the consent, file Form 1128, Application To Adopt, Change, or Retain a Tax Year. However, under certain conditions, a RIC may change its tax year without obtaining the consent.

   See the Instructions for Form 1128 and Pub. 538 for more information on accounting periods and tax years.

Rounding Off to Whole Dollars

A RIC can round off cents to whole dollars on its return and schedules. If the RIC does round to whole dollars, it must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 cents to 99 cents to the next dollar (for example, $1.39 becomes $1 and $2.50 becomes $3).

If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

Recordkeeping

Keep the RIC's records for as long as they may be needed for administration of any provision of the Internal Revenue Code. Usually, records that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Keep records that verify the RIC's basis in property for as long as they are needed to figure the basis of the original or replacement property.

The RIC should keep copies of all filed returns. They help in preparing future and amended returns and in the calculation of earnings and profits.

Other Forms That May Be Required

In addition to Form 1120-RIC, the RIC may have to file some of the following forms. Also see Pub. 542, Corporations, for an expanded list of forms the RIC may be required to file.

Form 976,   Claim for Deficiency Dividends Deductions by a Personal Holding Company, Regulated Investment Company, or Real Estate Investment Trust. Use this form to claim a deficiency dividend under section 860.

Form 1096,    Annual Summary and Transmittal of U.S. Information Returns. Use Form 1096 to transmit Forms 1099 and 5498 to the Internal Revenue Service.

Form 1099-DIV,   Dividends and Distributions. Report certain dividends and distributions.

Form 1099-INT,   Interest Income. Report interest income.

Form 2438,   Undistributed Capital Gains Tax Return, must be filed by the RIC if it designates undistributed net long-term capital gains under section 852(b)(3)(D).

Form 2439,   Notice to Shareholder of Undistributed Long-Term Capital Gains, must be completed and a copy given to each shareholder for whom the RIC paid tax on undistributed net long-term capital gains under section 852(b)(3)(D).

Form 3520,   Annual Return to Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, may be required if the RIC received a distribution from, was a grantor of, or transferor to, a foreign trust during the tax year. See Question 5 of Schedule N (Form 1120).

Form 8613,   Return of Excise Tax on Undistributed Income of Regulated Investment Companies. If the RIC is liable for the 4% excise tax on undistributed income under section 4982 or makes an election under section 4982(e)(4), it must file this return for the calendar year.

Form 8927,    Determination Under 860(e)(4) by a Qualified Investment Entity. Use Form 8927 to establish a determination date under Section 860(e)(4) for purposes of making a deficiency dividend distribution.

Statements

Reportable transaction disclosure statement.   Disclose information for each reportable transaction in which the RIC participated. Form 8886, Reportable Transaction Disclosure Statement, must be filed for each tax year that the federal income tax liability of the RIC is affected by its participation in the transaction. The following are reportable transactions.

  1. Any listed transaction, which is a transaction that is the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction and identified by notice, regulation, or other published guidance as a listed transaction.

  2. Any transaction offered under conditions of confidentiality for which the RIC (or a related party) paid an advisor a fee of at least $250,000.

  3. Certain transactions for which the RIC (or a related party) has contractual protection against disallowance of the tax benefits.

  4. Certain transactions resulting in a loss of at least $10 million in any single year or $20 million in any combination of years.

  5. Any transaction identified by the IRS by notice, regulation, or other published guidance as a “transaction of interest.” See Notice 2009-55, 2009-31 I.R.B. 170.

  For more information, see Regulations section 1.6011-4. Also, see the Instructions for Form 8886.

Penalties.

The RIC may have to pay a penalty if it is required to disclose a reportable transaction under section 6011 and fails to properly complete and file Form 8886. Penalties may also apply under section 6707A if the RIC fails to file Form 8886 with its Form 1120-RIC, fails to provide a copy of Form 8886 to the Office of Tax Shelter Analysis (OTSA), or files a form that fails to include all the information required (or includes incorrect information). Other penalties, such as an accuracy-related penalty under section 6662A, may also apply. See the Instructions for Form 8886 for details on these and other penalties.

Reportable transactions by material advisors.   Material advisors to any reportable transaction must disclose certain information about the reportable transaction by filing Form 8918, Material Advisor Disclosure Statement, with the IRS. For details, see the Instructions for Form 8918.

Safe harbor under Temporary Regulations section 1.67-2T(j)(2).   Generally, shareholders in a nonpublicly offered fund that are individuals or pass-through entities are treated as having received a dividend in an amount equal to the shareholder's allocable share of affected RIC expenses for the calendar year. They are also treated as having paid or incurred an expense described in section 212 (and subject to the 2% limitation on miscellaneous itemized deductions) in the same amount for the calendar year.

Election.

A nonpublicly offered fund may elect to treat its affected RIC expenses for a calendar year as equal to 40% of the amount determined under Temporary Regulations section 1.67-2T(j)(1)(i) for that calendar year.

To make this election, attach to Form 1120-RIC for the tax year that includes the last day of the calendar year for which the fund makes the election a statement that it is making an election under Temporary Regulations section 1.67-2T(j)(2). Once made, the election remains in effect for all subsequent calendar years and may not be revoked without IRS consent. See Temporary Regulations section 1.67-2T for definitions and other details.

Transfers to a corporation controlled by the transferor.   Every significant transferor (as defined in Regulations section 1.351-3(d) that receives stock of a corporation in exchange for property in a nonrecognition event must include the statement required by Regulations section 1.351-3(a)) on or with the transferor's tax return for the tax year of the exchange. The transferee corporation must include the statement required by Regulations section 1.351-3(b) on or with its return for the tax year of the exchange, unless all the required information is included in any statement(s) provided by a significant transferor that is attached to the same return for the same section 351 exchange. If the transferor or transferee corporation is a controlled foreign corporation, each U.S. shareholder (within the meaning of section 951(b)) must include the required statement on or with its return.

Distributions under section 355.   Every corporation that makes a distribution of stock or securities of a controlled corporation, as described in section 355 (or so much of section 356 as it relates to section 355), must attach the statement required by Regulations section 1.355-5 to its return for the year of the distribution. If the distributing corporation is a controlled foreign corporation, each U.S. shareholder (within the meaning of section 951(b)), must include the statement on or with its return.

Dual consolidated losses.   If a domestic corporation incurs a dual consolidated loss (as defined in Regulations section 1.1503-2(c)(5)), the corporation (or consolidated group) may need to attach an elective relief agreement and/or an annual certification as provided in Regulations section 1.1503-2(g)(2).

Notice to shareholders.   A RIC must notify its shareholders within 60 days after the close of its tax year of the distribution made during the tax year that qualifies for the dividends-received deduction under section 243. For purposes of the dividends-received deduction, a capital gain dividend received from a RIC is not treated as a dividend. The capital gain dividend is treated as a long-term capital gain by the shareholder.

Consent to partnership election to close its books monthly.   Certain money market funds that obtain an interest in an eligible partnership that invests in assets exempt from taxation under section 103 may be qualified to pay exempt-interest dividends to their shareholders. To qualify for payment of exempt-interest dividends, a RIC must meet the quarterly net asset value (NAV) requirements under section 852(b)(5). To maintain the required NAV at the end of each quarter, the RIC may take into account on a monthly basis its distributive share of partnership items if the eligible partnership makes a proper election to close its books at the end of each month. See Rev. Proc. 2003-84 for details.

Eligibility.

A RIC is entitled to take into account its distributive share of partnership items on a monthly basis if:

  • The RIC is entitled to hold itself out as a money market fund, or an equivalent of a money market fund.

  • The RIC provides a statement to the partnership that it consents to the partnership's election to close its books monthly and that the RIC will include in its taxable income its distributive share of partnership items in a manner consistent with the election. See Rev. Proc. 2003-84 for the required contents of the statement of consent.

  • The RIC provides the statement of consent to the custodian or manager of the partnership by the last day of the second month after the month in which the RIC acquires the partnership interest.

  • The partnership is eligible under Rev. Proc. 2003-84 to make the monthly closing election and the election is effective by the second month after the month in which the RIC acquires the partnership interest.

Statement of consent.   The consent to a partnership's monthly closing election is effective for the month in which the RIC acquires the partnership interest, unless the RIC requests that the consent be effective for either of the two immediately following calendar months. In addition to timely providing the partnership with the statement of consent, the statement should be filed with Form 1120-RIC for the first tax year in which the consent is effective. The monthly closing consent (and the partnership's election) may be revoked only with the consent of the Commissioner. However, the RIC's consent becomes ineffective on any day when the RIC ceases to be an eligible partner and the partnership's monthly closing election is terminated as of the first day of any month the partnership is no longer eligible for the election under Rev. Proc. 2003-84. For more details, see the Revenue Procedure.

Annual information statement for elections under section 108(i).   If the RIC made an election in 2009 or 2010 to defer income from cancellation of debt (COD) in connection with the reacquisition of an applicable debt instrument, the RIC must attach a statement to its return beginning with the tax year following the tax year for which the RIC made the election, and ending the first tax year all income deferred has been included in income. The statement must be labeled "Section108(i) Information Statement" and must clearly identify, for each applicable debt instrument to which an election under section 108(i) applies, the following.

  1. Any deferred COD income that is included in income in the current tax year.

  2. Any deferred COD income that has been accelerated because of an event described in section 108(i)(5)(D) and must be included in income in the current tax year. Include a description and the date of the acceleration event.

  3. Any deferred COD income that has not been included in income in the current or prior tax years.

  4. Any deferred original issue discount (OID) deduction allowed as a deduction in the current tax year.

  5. Any deferred OID deduction that is allowed as a deduction in the current tax year because of an accelerated event described in section 108(i)(5)(D).

  6. Any deferred OID deduction that has not been deducted in the current or prior tax years.

  In addition, annually include a copy of the election statement the RIC filed to make the election to defer the income. For more information on deferring the income, see the instructions for line 7. For more information regarding the annual information statement, see Rev. Proc. 2009-37, 2009-36 I.R.B. 309.

Other forms and statements.   See Pub. 542, Corporations, for a list of other forms and statements a corporation may need to file in addition to the forms and statements discussed throughout these instructions.

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