Specific Instructions

Period Covered

File the 2013 return for calendar year 2013 and fiscal years that begin in 2013. For a fiscal year return, fill in the tax year space at the top of the form.

Note.

The 2013 Form 1120-RIC may also be used if:

  • The RIC has a tax year of less than 12 months that begins and ends in 2014; and

  • The 2014 Form 1120-RIC is not available at the time the RIC is required to file its return.

The RIC must show its 2014 tax year information on the 2013 Form 1120-RIC and take into account any tax law changes that are effective for tax years beginning after December 31, 2013.

Name and Address

Enter the RIC's true name (as set forth in the charter or other legal document creating it), address, and EIN on the appropriate lines. Enter the address of the RIC's principal office or place of business. Include the suite, room, or other unit number after the street address. If the post office does not deliver mail to the street address and the RIC has a P.O. box, show the box number instead.

Note.

Do not use the address of the registered agent for the state in which the RIC is incorporated. For example, if a business is incorporated in Delaware or Nevada and the RIC's principal office is located in Little Rock, AR, the RIC should enter the Little Rock address.

If the RIC receives its mail in care of a third party (such as an accountant or an attorney), enter on the street address line “C/O” followed by the third party's name and street address or P.O. box.

Item B. Date RIC Was Established

If this return is being filed for a series fund (as described in section 851(g)(2)), enter the date the fund was created. Otherwise, enter the date the RIC was incorporated or organized.

Item C. EmployerIdentification Number (EIN)

Enter the RIC's EIN. If the RIC does not have an EIN, it must apply for one. An EIN may be applied for:

  • Online— visit IRS.gov and click on “Apply for an EIN Online”. The EIN is issued immediately once the application information is validated.

  • By telephone at 1-800-829-4933, or at 1-800-829-4059 for individuals who are deaf, hard of hearing, or have a speech disability and who have access to TTY/TDD equipment.

  • By mailing or faxing Form SS-4, Application for Employer Identification Number.

If the RIC has not received its EIN by the time the return is due, write “Applied for” and the date you applied in the space for the EIN. See the Instructions for Form SS-4 for details.

Item D. Total Assets

Enter the RIC's total assets (as determined by the accounting method regularly used in keeping the fund's books and records) at the end of the tax year. If there are no assets at the end of the tax year, enter -0-.

Item E. Final Return, Name Change, Address Change, or Amended Return

  • If this is the RIC's final return and it will no longer exist, check the “Final return” box.

  • If the RIC has changed its name since it last filed a return, check the “Name change” box. Generally, a RIC must also have amended its articles of incorporation and filed the amendment with the state in which it was incorporated.

  • If the RIC has changed its address since it last filed a return (including a change to an “in care of” address), check the “Address change” box.

Note.

If a change in address or responsible party occurs after the return is filed, use Form 8822-B, Change of Address or Responsible Party—Business, to notify the IRS of the new address. See the Instructions for Form 8822-B for details.

Amended return.   If the RIC is amending its return, check the box for “Amended return,” complete the entire return, correct the appropriate lines with the new information, and refigure the RIC's tax liability. Attach a statement that explains the reason for the amendments and identifies the lines being changed on the amended return.

Part I—InvestmentCompany Taxable Income

Income

Line 1. Dividends.   A RIC that is the holder of record of any share of stock on the record date for a dividend payable on that stock must include the dividend in gross income by the later of: the date the share became ex-dividend, or the date the RIC acquired the share.

Line 2. Interest.   Enter taxable interest on U.S. obligations and on loans, notes, mortgages, bonds, bank deposits, corporate bonds, tax refunds, etc.

   Do not offset interest expense against interest income. Special rules apply to interest income from certain below-market-rate loans. See section 7872 for more information on the tax treatment of loans on which inadequate or no interest is charged.

Note.

Report tax-exempt interest income on Schedule K, item 8. Do not include tax-exempt interest on line 2. Also, if required, include the same amount on Schedule M-1, line 7.

  Include interest income from tax credit bonds on line 2. If the RIC elects to pass through the credits to shareholders, see the instructions for Part II, Schedule A, line 7.

Line 3. Net foreign currency gain or (loss) from section 988 transactions.   Enter the net foreign currency gain (loss) from section 988 transactions treated as ordinary income or loss under section 988(a)(1)(A). Attach a statement detailing each separate transaction.

Line 4. Payments with respect to securities loans.   Enter the amount received or accrued from a broker as compensation for securities loaned by the RIC to the broker for use in completing market transactions. The payments must meet the requirements of section 512(a)(5).

Line 5. Excess of net short-term capital gain over net long-term capital loss.   Enter the amount from Schedule D (Form 1120), line 16. Every sale or exchange of a capital asset must be reported even if no gain or loss is indicated.

  If a RIC has a net capital loss for any tax year, the excess of the net short-term capital loss over the net long term capital gain shall be a short-term capital loss arising on the first day of the next tax year. The excess of the net long-term capital loss over the net short-term capital gain shall be a long-term capital loss arising on the first day of the next tax year. Also, there is no limit on the number of tax years that a RIC is allowed to carryover a net capital loss. See section 1212(a)(3) for more information.

Line 7. Other income.   Enter any other taxable income (loss) not reported on lines 1 through 6, except net capital gain reported in Part II. List the type and amount of income on an attached statement. If the RIC has only one item of other income, describe it in parentheses on line 7. Examples of other income to report on line 7 include:
  • Gross rents.

  • Recoveries of fees or expenses in settlement or litigation.

  • Amounts received or accrued as consideration for entering into agreements to make real property loans or to purchase or lease real property.

  • Recoveries of bad debts deducted in prior years under the specific charge-off method.

  • Refunds of taxes deducted in prior years to the extent they reduced income subject to tax in the year deducted (see section 111). Do not offset current year taxes against prior year tax refunds.

  • The recapture amount under section 280F if the business use of listed property drops to 50% or less. To figure the recapture amount, complete Part IV of Form 4797.

  • Ordinary income from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset ordinary losses against ordinary income. Instead, include the losses on line 22. Show the partnership's name, address, and EIN on a separate statement attached to this return. If the amount entered is from more than one partnership, identify the amount from each partnership.

  • Any net positive section 481 income adjustment due to a change in method of accounting. See Form 3115 and its instructions for more information.

  • Part or all of the proceeds received from certain corporate-owned life insurance contracts issued after August 17, 2006. Corporations that own one or more employer-owned life insurance contracts issued after this date must file Form 8925, Report of Employer-Owned Life Insurance Contracts. See section 101(j) for details.

  • Income from discharge of indebtedness for the purchase of a debt instrument for less than its adjusted issue price. However, for a reacquisition of an applicable debt instrument after December 31, 2008, and before January 1, 2011, a RIC can elect, under section 108(i), to defer the income from discharge of indebtedness in connection with the election.

  If the RIC makes the election, the income is deferred and ratably included in income over the 5-year period beginning with:
  1. For a reacquisition occurring in 2009, the fifth tax year following the tax year in which the reacquisition occurred, and

  2. For a reacquisition occurring in 2010, the fourth tax year following the tax year in which the reacquisition occurred.

  Once made, the election is irrevocable and the exclusions for COD income under section 108(a)(1)(A), (B), (C), and (D) do not apply for the tax year of the election or any later tax year. For more information, see section 108(i), Regulations section 1.108(i)-1, and Rev. Proc. 2009-37. See the required Annual information statement for elections under section 108(i), discussed earlier. Also, see section 108(i)(5)(D) regarding any deferred COD income that has been accelerated because of certain events and must be included in income in the current year.

  If the RIC is a direct or indirect partner in a partnership, other special rules apply. See Regulations section 1.108(i)-2.
  • The RIC's share of the following income from Form 8621, Information Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund.

    1. Ordinary earnings of a qualified electing fund (QEF).

    2. Gain or loss from marking passive foreign investment company income (PFIC) stock to market.

    3. Gain or loss from sale or other disposition of Section 1296 stock.

    4. Excess distributions from a section 1291 fund.

  See Form 8621 and the Instructions for Form 8621 for details.

Deductions

Limitations on Deductions

Transactions between related taxpayers.   Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the year the payment is includible in the income of the related party. See section 267 for limitations on deductions for interest and expenses paid to a related party.

  Also see the instructions for Form 8926, Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information, with respect to section 163(j).

Golden parachute payments.   A portion of the payments made by a RIC to key personnel that exceeds their usual compensation may not be deductible. This occurs when the RIC has an agreement (golden parachute) with key employees to pay them an amount substantially in excess of their base amount if control of the RIC changes. See section 280G and Regulations section 1.280G-1 for more information. Also, see the instructions for line 9.

Business start-up and organizational costs.   A RIC can elect to deduct up to $5,000 of business start-up and up to $5,000 of organizational costs paid or incurred after October 22, 2004. Any remaining cost must be amortized. The $5,000 deductions is reduced (but not below zero) by the amount the total costs exceed $50,000. If the total costs are $55,000 or more, the deduction is reduced to zero.

Time for making an election.

The RIC generally elects to deduct start-up or organizational costs by claiming the deduction on its income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins. However, for start-up or organizational costs paid or incurred before September 9, 2008, the RIC may be required to attach a statement to its return to elect to deduct such costs. See Regulations sections 1.195-1 and 1.248-1 for details.

If the RIC timely filed its return for the year without making an election, it can still make an election by filing an amended return within 6 months of the due date of the return (excluding extensions). Clearly indicate the election on the amended return and write "Filed pursuant to section 301.9100-2" at the top of the amended return. File the amended return at the same address the RIC filed its original return. The election applies when figuring taxable income for the current tax year and all subsequent years.

Note.

The RIC can choose to forgo the elections above by clearly electing to capitalize its start-up or organizational costs on an income tax return filed by the due date (including extensions) for the tax year in which the active trade or business begins.

  Report the deductible amount of such costs and any amortization on line 22. For amortization that begins during the 2013 tax year, complete and attach Form 4562.

  For more details on business start-up and organizational costs, see Pub. 535, Business Expenses.

Section 265(a)(3) limitation.   If the RIC paid exempt-interest dividends during the tax year (including those dividends deemed paid under section 855), no deduction is allowed for that portion of otherwise deductible expenses allocable to tax-exempt income. The excluded amount is determined by the amount tax-exempt income bears to total gross income (including tax-exempt income but excluding capital gain net income).

Net operating loss deduction.   The net operating loss deduction is not allowed.

Passive activity limitations.   Limitations on passive activity losses and credits under section 469 apply to RICs that are closely held (as defined in section 469(j)(1)). RICs subject to the passive activity limitations must complete Form 8810, Corporate Passive Activity Loss and Credit Limitations, to compute their allowable passive activity loss and credit. Before completing Form 8810, see Temporary Regulations section 1.163-8T, for rules on allocating interest expense among activities.

Closely held corporation.

A RIC is closely held if at any time during the last half of the tax year more than 50% in value of its outstanding stock is directly or indirectly owned by or for not more than five individuals and it is not a personal service corporation.

Line 9. Compensation of officers.   Enter the deductible officer's compensation on line 9. The RIC determines who is an officer under the laws of the state where incorporated. Do not include compensation deductible elsewhere on the return, such as elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

  If the RIC's total receipts are $500,000 or more, total receipts by adding:
  1. Line 8, Part I,

  2. Net capital gain from line 1, Part II, and

  3. Line 9a, Form 2438.

Disallowance of deduction for employee compensation in excess of $1 million.

Publicly held corporations cannot deduct compensation to a “covered employee” to the extent that the compensation exceeds $1 million. Generally, a covered employee is:

  • The principal executive officer (or an individual acting in that capacity) as of the end of the tax year; or

  • A principal employee whose total compensation must be reported to shareholders under the Securities Exchange Act of 1934 because the employee is among the three highest compensated officers for that tax year (other than the principal executive officer).

For this purpose, compensation does not include:

  • Income from certain employee trusts, annuity plans, or pensions.

  • Any benefit paid to an employee that is excluded from the employee's income.

The deduction limit does not apply to:

  • Commissions based on individual performance;

  • Qualified performance-based compensation; and

  • Income payable under a written, binding contract in effect on February 17, 1993.

The $1 million limit is reduced by amounts disallowed as excess parachute payments under section 280G.

For details, see section 162(m) and Regulations section 1.162-27. Also, see Notice 2007-49, 2007-25 I.R.B. 1429.

Line 10. Salaries and wages.   Enter the salaries and wages paid for the tax year, reduced by the amount claimed on:
  • Form 5884, Work Opportunity Credit,

  • Form 8844, Empowerment Zone Employment Credit,

  • Form 8845, Indian Employment Credit, and

  • Form 8932, Credit for Employer Differential Wage Payments.

  See the instructions for these forms for more information.

  Do not include salaries and wages deductible elsewhere on the return, such as amounts included in officer's compensation, elective contributions to a section 401(k) cash or deferred arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.

  
If the RIC provided taxable fringe benefits to its employees, such as personal use of a car, do not deduct as wages any amounts deducted elsewhere.

Line 11. Rents.   If the RIC rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred during the year. Also, complete Part V of Form 4562, Depreciation and Amortization. If the RIC leased a vehicle for a term of 30 days or more, the deduction for the vehicle lease expense may have to be reduced by an amount called the inclusion amount.

  
The RIC may have an inclusion amount if:
The lease term began: And the vehicle's FMV on the first day of the lease exceeded:
Cars (excluding trucks and vans)  
After 12/31/12 but before 1/1/14 $19,000
After 12/31/07 but before 1/1/13 $18,500
Trucks and Vans  
After 12/31/09 but before 1/1/14 $19,000
After 12/31/08 but before 1/1/10 $18,500
After 12/31/07 but before 1/1/09 $19,000
If the lease term began before January 1, 2004, see Pub. 463, Travel, Entertainment, Gift, and Car Expenses, to find out if the RIC has an inclusion amount. The inclusion amount for lease terms beginning in 2014 will be published in the Internal Revenue Bulletin in early 2014.

Line 12. Taxes and licenses.   Enter taxes paid or accrued during the tax year, but do not include the following:
  • Federal income taxes (except for the tax imposed on net recognized built-in gain allocable to ordinary income).

  • Foreign or U.S. possession income taxes if a foreign tax credit is claimed, or if the RIC made an election under section 853.

  • Excise taxes imposed under section 4982 on undistributed RIC income.

  • Taxes not imposed on the RIC.

  • Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of property (these taxes must be treated as a part of the cost of the acquired property or, in the case of a disposition, as a reduction in the amount realized on the disposition).

  • Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).

  • Taxes deducted elsewhere on the return.

  See section 164(d) for information on apportionment of taxes on real property between seller and purchaser.

Line 13. Interest.   The RIC must make an interest allocation if the proceeds of a loan were used for more than one purpose (for example, to purchase a portfolio investment and to acquire an interest in a passive activity). See Temporary Regulations section 1.163-8T for the interest allocation rules.

  The following interest is not deductible:
  • Interest on indebtedness incurred or continued to purchase or carry obligations if the interest is wholly exempt from income tax. See section 265(b) for special rules and exceptions for financial institutions. Also see section 265(b)(7) for a temporary de minimis exception for financial institutions for certain tax exempt bonds issued in 2009 and 2010.

  • For cash basis taxpayers, prepaid interest allocable to years following the current tax year. For example, a cash basis calendar year taxpayer who in 2013 prepaid interest allocable to any period after 2013 can deduct only the amount allocable to 2013.

  • Interest and carrying charges on straddles. Generally, these amounts must be capitalized. See section 263(g).

   Special rules apply to:
  • Disqualified interest on certain indebtedness under section 163(j). See Form 8926, Disqualified Corporate Interest Expense Disallowed Under Section 163(j) and Related Information, and the related instructions.

  • Interest on which no tax is imposed (see section 163(j)).

  • OID on certain high-yield discount obligations. See section 163(e)(5) to determine the amount of the deduction for OID that is deferred and the amount that is disallowed on a high-yield discount obligation. The rules under section 163(e)(5) do not apply to certain high-yield discount obligations issued after August 31, 2008 and before January 1, 2011. See section 163(e)(5)(F). Also, see Notice 2010-11, 2010-4 I.R.B. 326.

  • The deduction for interest when the RIC is a policyholder or beneficiary with respect to a life insurance, endowment, or annuity contract issued after June 8, 1997. For details, see section 264(f). Attach a statement showing the computation of the deduction.

  • Section 108(i) OID deduction. If the RIC issued a debt instrument with OID that is subject to section 108(i)(2) because of an election to defer income from the cancellation of debt (COD), the deduction for this OID is deferred until the COD is includible in income. The accrued OID is allowed as a deduction ratably over the 5-year period the COD is includible in income. The deduction is limited to the amount of COD subject to the section 108(i) election. See section 108(i)(5)(D) regarding any deferred COD deduction that is allowed as a deduction in the current year because of an accelerated event.

  
Interest expense cannot be used to offset interest income.

Line 14. Depreciation.   Include on line 14 depreciation and the cost of certain property that the RIC elected to expense under section 179. See Form 4562 and the related instructions to figure the amount of depreciation to enter on this line.

Line 22. Other deductions.   Attach a statement listing by type and amount all allowable deductions that are not specifically deductible elsewhere on Form 1120-RIC. Generally, a deduction may not be taken for any amount that is allocable to tax-exempt income. See section 265(b) for exceptions.

  Examples of other deductions include:
  • Amortization. See Form 4562.

  • Certain business start-up and organizational costs the RIC elects to amortize or deduct.

  • Supplies used and consumed in the business.

  • Utilities.

  • Ordinary losses from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset ordinary income against ordinary losses. Instead, include the income on line 7. Show the partnership's name, address, and EIN on a separate statement attached to this return. If the amount is from more than one partnership, identify separately the amount from each partnership.

  • Deduction for certain energy efficient commercial building property placed in service before January 1, 2014. See section 179D. Also, see Notice 2006-52, 2006-26 I.R.B. 1175, as amplified and clarified by Notice 2008-40, 2008-14 I.R.B. 725, and as modified by Notice 2012-26, 2012-17 I.R.B. 847.

  • Any extraterritorial income exclusion (from Form 8873, line 52).

  • Any net negative section 481(a) adjustment.

  
Penalties or fines paid to any government agency or instrumentality because of a violation of a law are not deductible. See Chapter 11, Other Expenses, in Publication 535 for additional information.

Charitable contributions.   Enter contributions or gifts actually paid within the tax year to or for the use of charitable and governmental organizations described in section 170(c) and any unused contribution carryovers.

  RICs reporting taxable income on the accrual method may elect to treat as paid during the tax year any contributions paid by the 15th day of the 3rd month after the end of the tax year if the contributions were authorized by the board of directors during the tax year. Attach a declaration to the return that includes the date the resolution was adopted.

Limitation on deduction.

The total amount claimed cannot be more than 10% of taxable income (the sum of Part I, line 26; Part ll, line 3; and Form 2438, line 11) computed without regard to the following:

  • Any deduction for contributions.

  • The domestic production activities deduction.

  • The deduction allowed under section 249, related to any premium paid or incurred upon the repurchase of a convertible bond.

Carryover.

Charitable contributions over the 10% limitation cannot be deducted for the tax year but may be carried over to the next 5 tax years subject to certain limitations.

For more information on charitable contributions, including substantiation and recordkeeping requirements, see the regulations under section 170 and Pub. 526, Charitable Contributions.

Contributions to organizations conducting lobbying activities.

Contributions made to an organization that conducts lobbying activities are not deductible if:

  • The lobbying activities relate to matters of direct financial interest to the donor's trade or business and

  • The principal purpose of the contribution was to avoid federal income tax by obtaining a deduction for activities that would have been nondeductible under the lobbying expense rules if conducted directly by the donor.

    For information on contributions to charitable organizations that conduct lobbying activities, see section 170(f)(9).

Pension, profit-sharing, etc., plans.   Enter contributions to qualified pension, profit-sharing, or other funded-deferred compensation plans. Employers who maintain such a plan generally must file Form 5500, Annual Return/Report of Employee Benefit Plan, even if the plan is not a qualified plan under the Internal Revenue Code. The filing requirement applies even if the RIC does not claim a deduction for the current tax year. There are penalties for failure to file these forms on time and for overstating the pension plan deduction. See sections 6652(e) and 6662(f).

Travel, meals, and entertainment.   Subject to certain limitations and restrictions, the RIC can deduct ordinary and necessary travel, meals, and entertainment expenses incurred in its trade or business.

Travel.

The RIC cannot deduct travel expenses of any individual accompanying a corporate officer or employee unless:

  • That individual is an employee of the RIC and

  • His or her travel is for a bona fide business purpose that would otherwise be deductible by that individual.

Meals and entertainment.

Generally, the RIC can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid or incurred in its trade or business.

Amounts treated as compensation.

Generally, the RIC may be able to deduct otherwise nondeductible entertainment, amusement or recreation expenses if the amounts are treated as compensation to the recipient and reported on Form W-2 for an employee or on Form 1099-MISC for an independent contractor.

However, if the recipient is an officer, director, beneficial owner (directly or indirectly), or other “specified individual ” (as defined in section 274(e)(2)(B) and Regulations section 1.274-9(b)), special rules apply. See section 274(e)(2), and Regulations sections 1.274-9 and 1.274-10.

   See section 274 and Pub. 463 for a more extensive discussion of these topics.

Lobbying expenses.   Generally, lobbying expenses are not deductible. Examples of non-deductible expenses include:
  • Amounts paid or incurred in connection with influencing federal or state legislation (but not local legislation) or

  • Amounts paid or incurred in connection with any communication with certain federal executive branch officials in an attempt to influence the official actions or positions of the officials. See Regulations section 1.162-29 for the definition of “influencing legislation.

  Dues and other similar amounts paid to certain tax-exempt organizations may not be deductible. See section 162(e)(3). Certain in-house lobbying expenditures that do not exceed $2,000 are deductible.

  For more information on other deductions that may apply to RICs, see Pub. 535.

Line 25a. Deductions for dividends paid.    Enter the amount from Schedule A, line 8a.

Line 25b. Section 851(d)(2) and section 851(i) deductions.    Enter the amount from Schedule J, line 2c.

Tax and Payments

Line 28b. Estimated tax payments.   Enter any estimated tax payments the RIC made for the tax year.

Line 28f. Credit from Form 2439.   Enter the credit from Form 2439 for the RIC's share of the tax paid by another RIC or a Real Estate Investment Trust (REIT) on undistributed long-term capital gains included in the RIC's income. Attach Form 2439 to Form 1120-RIC.

Line 28g. Credit for federal tax on fuels.   Complete and attach Form 4136, Credit for Federal Tax Paid on Fuels, if the RIC qualifies to take this credit.

Line 28h. Refundable credit from Form 8827.   If the RIC elected to claim certain minimum tax credits instead of any additional first-year special depreciation allowance for eligible property, see the instructions for Form 8827. Enter on line 28h the amount from line 8c of Form 8827, if applicable.

  
The RIC must use the refundable credits from Form 8827 to reduce any built-in gains tax derived from property that it owned when it was a C corporation, before the credits can be used to reduce RIC taxable income. See the instructions for line h of the Built-in Gains Tax Worksheet Instructions later.

Line 28i. Backup withholding.   If the RIC had income tax withheld from any payments it received, because, for example, it failed to give the payer its correct EIN, include the amount withheld in the total for line 28i. Enter the amount withheld and the words “Backup Withholding” in the blank space above the line 28i.

Line 29. Estimated tax penalty.   A RIC that does not make estimated tax payments when due may be subject to an underpayment penalty for the period of underpayment. See the instructions for Form 2220, Underpayment of Estimated Tax by Corporations, for more information.

Part II — Tax on Undistributed Net Capital Gain Not Designated Under Section 852(b)(3)(D)

Line 1.   Enter the net capital gain from line 17 of Schedule D (Form 1120).

Line 2.   Enter the capital gain dividends from Schedule A, line 8b.

Line 4. Capital gains tax.   Multiply the amount on line 3 by 35% (.35). Enter the result here and on Schedule J, line 2b.

Schedule A—Deduction for Dividends Paid

Column (a)   is used to determine the deduction for dividends paid resulting from income derived from ordinary dividends.

Column (b)   is used to determine the deduction for dividends paid resulting from income derived from capital gain dividends.

  Section 561 (taking into account sections 852(b)(7), 852(c)(3)(B), and 855(a)) determines the deduction for dividends paid. Do not take into account exempt-interest dividends defined in section 852(b)(5) or any amount reported for the tax year on Form 2438, line 9b. See Regulations section 1.852-11 for information on post-October currency or capital losses.

Line 3.   Dividends, both ordinary and capital gain, declared and payable to shareholders of record in October, November, or December are treated as paid by the RIC and received by each shareholder on December 31 of that calendar year provided that they are actually paid in January of the following calendar year. Enter on line 3 all such dividends not already included on line 1 or 2.

Line 6.   Enter the foreign tax paid deduction allowed as an addition to the dividends paid deduction under section 853(b)(1)(B). See the instructions for Item 10 of Schedule K for information on the election available under section 853(a).

Line 7.   If the RIC elects under Section 853A to pass through credits from qualified tax credit bonds to shareholders, increase the dividends paid deduction by the amount of the credits distributed to shareholders. To make the election, see the instructions for Item 11, under Schedule K—Other Information.

Schedule B—Income From Tax-Exempt Obligations

If, at the close of each quarter of the tax year, at least 50% of the value of the fund's assets consisted of tax-exempt obligations under section 103(a), the RIC qualifies under section 852(b)(5) to pay exempt-interest dividends for the tax year. See section 852(b)(5)(A) for the definition of exempt-interest dividends and other details.

In the case of a qualified “fund of funds” structure, a RIC may pay exempt-interest dividends without regard to the requirement that at least 50% of the value of the funds assets consist of tax-exempt obligations. See section 852(g) for more information.

If this applies, check the “Yes” box on line 1 and complete lines 2 through 5.

Schedule J—Tax Computation

Line 1

If the RIC is a member of a controlled group, check the box on line 1 and complete and attach Schedule O (Form 1120), Consent Plan and Apportionment Schedule for a Controlled Group. See Schedule O (Form 1120) and its instructions for more information.

Line 2a–Tax on Investment Company Taxable Income

Members of a controlled group must use Schedule O (Form 1120) to figure the tax for the group. Most corporations that are not members of a controlled group, and do not file a consolidated return, figure their tax by using the Tax Rate Schedule below.

For a RIC that is not a personal holding company (PHC).   A RIC in compliance with Regulations section 1.852-6 regarding disclosure of the RIC's actual stock ownership (members of a controlled group should see the instructions for Schedule O (Form 1120)) is not a PHC and should compute its tax using the Tax Rate Schedule below:

Tax Rate Schedule

If the investment company taxable income 
(line 26, page 1) is:

 
Over— But not over— Tax is: Of the amount over—
$0 $50,000 15% $0
50,000 75,000 $ 7,500 + 25% 50,000
75,000 100,000 13,750 + 34% 75,000
100,000 335,000 22,250 + 39% 100,000
335,000 10,000,000 113,900 + 34% 335,000
10,000,000 15,000,000 3,400,000 + 35% 10,000,000
15,000,000 18,333,333 5,150,000 + 38% 15,000,000
18,333,333 35% 0

For a RIC that is a personal holding company.   A RIC that is not in compliance with Regulations section 1.852-6 is a PHC and is taxed at a flat rate of 35% on its investment company taxable income.

Line 2b–Capital Gains Tax

Enter the capital gains tax from line 4, Part II.

Line 2c—Taxes Imposed Under Section 851(d)(2) and 851(i)

Check the appropriate box(es) and enter the tax(es) imposed under the following relief provisions:

  • Section 851(d)(2) relating to failures to meet certain requirements of the asset test of section 851(b)(3); and

  • Section 851(i) relating to failures to meet certain requirements of the gross income test

See the instructions on page 2 for details on the requirements of the gross income and asset tests. Also, see sections 851(d)(2) and 851(i).

Attach a statement showing the computation of the tax(es) and an explanation of why the RIC failed to meet the requirement of the asset test or the gross income test and a description of why such failure is due to reasonable cause and not to willful neglect.

Line 2d–Alternative Minimum Tax (AMT)

Unless the RIC is treated as a small corporation exempt from the AMT, it may owe the AMT if it has any of the adjustments and tax preference items listed on Form 4626, Alternative Minimum Tax—Corporations. The RIC must file Form 4626 if its investment company taxable income (or loss), and retained capital gains not designated under section 852(b)(3)(D), plus adjustments and tax preference items, is more than the smaller of:

  • $40,000 or

  • The RIC's allowable exemption amount (from Form 4626).

See Form 4626 for definitions and details on how to figure the tax.

Apportioning tax preference items.   Items of tax preference may be apportioned by the RIC between the entity and its shareholders in accordance with section 59(d)(1)(A).

Line 2e—Income Tax

Deferred tax under section 1291.   If the RIC was a shareholder in a passive foreign investment company (PFIC), and received an excess distribution or disposed of its investment in the PFIC during the year, it must include the increase in taxes due under section 1291(c)(2) (from Form 8621) in the total for line 2e. On the dotted line to the left of line 2e write “Section 1291” and the amount.

  Do not include on line 2e any interest due under section 1291(c)(3). Instead, include the amount owed on Schedule J, line 6, other taxes.

  For more information on reporting the deferred tax and interest, see the Instructions for Form 8621.

Additional tax under section 197(f).   A RIC that elects to recognize gain and pay tax on the gain from the sale of a section 197 intangible under the related person exception to the anti-churning rules should include any additional tax due in the total for line 2e. On the dotted line to the left of line 2e, write “Section 197” and the amount. See section 197(f)(9)(B)(ii).

Line 3a– Foreign Tax Credit

To find out when a RIC can claim the credit for payment of income tax to a foreign country or U.S. possession, see Form 1118, Foreign Tax Credit—Corporations. The RIC may not claim this credit if an election under section 853 was made for the tax year. See Election under section 853(a), under Schedule K, Item 10.

Line 3b–Credit from Form 8834, line 7

Enter any qualified electric vehicle passive activity credits from prior years allowed for the current tax year from Form 8834, Qualified Electric Vehicle Credit, line 7 and attach Form 8834 to this return.

Line 3c–General Business Credit

The RIC is required to file Form 3800, General Business Credit, to claim most business credits. For a list of allowable credits, see Form 3800. Enter the allowable credit from Part II, line 38, of Form 3800, on line 3c. Also, see the applicable credit form and its instructions.

Line 3d–Other Credits

Minimum tax credit.   To figure the minimum tax credit and any carryforward of that credit, use Form 8827, Credit for Prior Year Minimum Tax—Corporations.

Bond credits from Form 8912.   Enter the allowable credits from Form 8912, Credit to Holders of Tax Credit Bonds, line 12. However, if the RIC elects to pass through credits from tax credit bonds to its shareholders, it cannot take the credit. See Item 11 under question 5 later for more information.

Line 5– Personal Holding Company Tax

A RIC is taxed as a personal holding company under section 542 if:

  • At least 60% of its adjusted ordinary gross income for the tax year is personal holding company income, and

  • At any time during the last half of the tax year more than 50% in value of its outstanding stock is owned, directly or indirectly, by five or fewer individuals.

See the Instructions for Schedule PH (Form 1120), U.S. Personal Holding Company (PHC) Tax, for definitions and details on how to figure the tax.

Line 6–Other Taxes

Include any of the following taxes and interest in the total on line 6. Check the appropriate box(es) for the form, if any, used to compute the total.

Recapture of investment credit.   If the RIC disposed of investment credit property or changed the property's use before the end of its useful life or recovery period, it may owe a tax. See Form 4255, Recapture of Investment Credit, for details.

Recapture of low-income housing credit.   If the RIC disposed of property (or there was a reduction in the qualified basis of the property) for which it took the low-income housing credit and the RIC did not follow the procedures that would have prevented recapture of the credit, it may owe a tax. See Form 8611, Recapture of Low-Income Housing Credit, and IRC section 42(j)(1) for more information.

Other.    Additional tax and interest amounts can be included in the total entered on line 6. Check the box for “Other” if the RIC includes any of the taxes and interest discussed below. See How to report, below, for details on reporting these amounts on an attached statement.
  • Recapture of qualified electric vehicle (QEV) credit. The RIC must recapture part of the QEV credit it claimed in a prior year if, within 3 full years of the date the vehicle was placed in service, it ceases to qualify for the credit. See Regulations section 1.30-1 for details on how to figure the recapture.

  • Recapture of Indian employment credit. Generally, if an employer terminates the employment of a qualified employee less than 1 year after the date of initial employment, any Indian employment credit allowed for a prior tax year because of wages paid or incurred to that employee must be recaptured. For details, see Form 8845 and section 45A.

  • Recapture of new markets credit (see Form 8874 and Regulations section 1.45D-1(e) for details).

  • Recapture of employer-provided childcare facilities and services credit (see Form 8882 and section 45F(d) for details).

  • Interest due on deferred gain recognition (section 1260(b)).

  • Interest due under section 1291(c)(3).

Built-in Gains Tax

If, on or after January 2, 2002, property of a C corporation becomes property of a RIC by either: (a) the qualification of the C corporation as a RIC; or (b) the transfer of such property to a RIC, then the RIC will be subject to the built-in gains tax under section 1374 unless the C corporation elects deemed sale treatment on the transferred property. If the C corporation does not make this election for tax years beginning in 2013, the RIC must pay tax on the net recognized built-in gain during the 5-year period beginning on its first day as a RIC or the day it acquired the property.

Recognized built-in gains and losses generally retain their character (for example, ordinary income or capital gain) and are treated the same as other gains or losses of the RIC. The RIC's tax on net recognized built-in gain is treated as a loss sustained by the RIC after October 31 of the same tax year (see the instructions for line i of the Built-in Gains Tax Worksheet, later). See Regulations section 1.337(d)-7 for details.

Different rules apply to elections to be a RIC and to transfers of property in a carryover basis transaction that occurred prior to January 2, 2002. For RIC elections and property transfers before this date, the C corporation is subject to deemed sale treatment on the transferred property unless the RIC elects section 1374 treatment. See Regulations section 1.337(d)-6 for information on how to make the election and figure the tax for RIC elections and property transfers before this date. The RIC may also rely on Regulations section 1.337(d)-5 for RIC elections and property transfers that occurred before January 2, 2002.

Built-in Gains Tax Worksheet Instructions

Complete the worksheet below to figure the built-in gains tax under Regulations section 1.337(d)-6 or 1.337(d)-7.

Line a.   Enter the amount that would be the taxable income of the RIC for the tax year if only recognized built-in gain, recognized built-in loss, and recognized built-in gain carryover were taken into account.

Line b.   Add the amounts shown on:
  • Form 1120-RIC, page 1, line 24,

  • Form 1120-RIC, Part II, line 1, and

  • Form 2438, line 11.

For this purpose, refigure line 24 on page 1 without regard to any election under section 852(b)(2)(F). Enter the result on line b of the Built-in Gains Tax Worksheet on the next page.

Line c.   The RIC's net unrealized built-in gain is the amount, if any, by which the FMV of the assets of the RIC at the beginning of its first RIC year (or as of the date the assets were acquired, for any asset with a basis determined by reference to its basis (or the basis of any other property) in the hands of a C corporation) exceeds the aggregate adjusted basis of such assets at that time.

  Enter on line c the RIC's net unrealized built-in gain reduced by the net recognized built-in gain for prior years. See sections 1374(c)(2) and (d)(1).

Line d.   If the amount on line b exceeds the amount on line a, the excess is treated as a recognized built-in gain in the succeeding tax year.

Line e.   Enter the section 1374(b)(2) deduction. Generally, this is any net operating loss or capital loss carryforward (to the extent of net capital gain included in recognized built-in gain for the tax year) arising in tax years for which the RIC was a C corporation. A capital loss carryforward must be used to reduce recognized built-in gain for the tax year to the greatest extent possible before it can be used to reduce the RIC's taxable income.

Line h.   Credit carryforwards arising in tax years for which the RIC was a C corporation must be used to reduce the tax on net built-in gain for the tax year to the greatest extent possible before the credit carryforwards can be used to reduce the tax on the RIC's taxable income.

Note.

If the RIC makes the election, the unused research and minimum tax credits must first be used to reduce the tax on net built-in gain for the tax year to the greatest extent possible. Any remaining unused research and minimum tax credits are included on line 28h to reduce the RIC's income tax. For more information, see the instructions for line 28h.

Line i.   The RIC's tax on the net recognized built-in gain is treated as a loss sustained by the RIC after October 31 of the same tax year. Deduct the tax attributable to:
  • Ordinary gain as a deduction for taxes on Form 1120-RIC, line 12.

  • Short-term capital gain as a short-term capital loss in Part I of Form 8949.

  • Long-term capital gain as a long-term capital loss in Part II of Form 8949.

How to Report

If the RIC checked the “Other” box, enter the tax or interest on line 6, Schedule J. Also, attach a statement, showing the computation of each item included in the total for line 6, and identify (a) the type of tax or interest, and (b) the applicable Code section.

Built-in Gains Tax Worksheet(keep for your records)

a. Excess of recognized built-in gains over recognized built-in losses a.  
b. Taxable income b.  
c. Enter the net unrealized built-in gain reduced by any net recognized built-in gain for all prior years c.  
d. Net recognized built-in gain (enter the smallest of lines a, b, or c) d.  
e. Section 1374(b)(2) deduction e.  
f. Subtract line e from line d. If zero, enter -0- here and on line i f.  
g. Enter 35% of line f g.  
h. Business credit and minimum tax credit carryforwards under section 1374(b)(3) from C corporation (see instructions) h.  
i. Tax. Subtract line h from line g (if zero or less, enter -0-). Enter here and include on line 6 of Schedule J (see instructions) i.  

Line 7–Total Tax

Include any deferred tax on the termination of a section 1294 election applicable to shareholders in a qualified electing fund in the amount entered on line 7. See Form 8621 and How to report, below.

Subtract from the total for line 7 the deferred tax on the RIC's share of the undistributed earnings of a qualified electing fund (see Form 8621).

How to report

Attach a statement showing the computation of each item included in, or subtracted from, the total for line 7. On the dotted line next to line 7, enter the amount of tax or interest, identify it as tax or interest, and specify the Code section that applies.

Schedule K–Other Information

The following instructions apply to questions 1 through 11. Complete all items that apply.

Question 3

Check the “Yes” box if the RIC is a subsidiary in a parent-subsidiary controlled group. This applies even if the RIC is a subsidiary member of one group and the parent corporation of another.

Note.

If the RIC is an “excluded member” of a controlled group (see section 1563(b)(2)), it is still considered a member of a controlled group for this purpose.

Question 5

Check the “Yes” box if one foreign person owned at least 25% of (a) the total voting power of all classes of stock of the RIC entitled to vote or (b) the total value of all classes of stock of the RIC.

The constructive ownership rules of section 318 apply in determining if a RIC is foreign owned. See section 6038A(c)(5) and the related regulations.

Enter on line 5b(1) the percentage owned by the foreign person specified in question 5. For line 5b(2), enter the name of the owner's country.

Note.

If there is more than one 25%-or-more foreign owner, complete lines 5b(1) and 5b(2) for the foreign person with the highest percentage of ownership.

Foreign person.   The term “foreign person” includes:
  • A foreign citizen or nonresident alien.

  • An individual who is a citizen or resident of a U.S. possession (but who is not a U.S. citizen or resident).

  • A foreign partnership.

  • A foreign corporation.

  • Any foreign estate or trust within the meaning of section 7701(a)(31).

  • A foreign government (or one of its agencies or instrumentalities) to the extent that it is engaged in the conduct of a commercial activity as described in section 892.

Owner's country.   For individuals, the term “owner's country” means the country of residence. For all others, it is the country where incorporated, organized, created, or administered.

Requirement to file Form 5472.   If the RIC checked “Yes,” it may have to file Form 5472, Information Return of a 25% Foreign Owned U.S. Corporation or a Foreign Corporation Engaged In a U.S. Trade or Business. Generally, a 25% foreign-owned corporation that had a reportable transaction with a foreign or domestic related party during the tax year must file Form 5472. See Form 5472 for filing instructions.

Item 8

Tax-exempt interest.   Show any tax-exempt interest received or accrued. Include any exempt-interest dividends received as a shareholder in a mutual fund or other RIC.

Item 10

Election under section 853(a).   A RIC may make an irrevocable election under section 853(a) to allow its shareholders to apply their share of the foreign taxes paid by the RIC either as a credit or a deduction. If the RIC makes this election, the amount of foreign taxes it paid during the tax year may not be taken as a credit or a deduction on Form 1120-RIC, but may be claimed on Form 1120-RIC, Schedule A, line 5, as an addition to the dividends-paid deduction.

Eligibility.

To qualify to make the election, the RIC must meet the following requirements.

  • More than 50% of the value of the RIC's total assets at the end of the tax year must consist of stock or securities in foreign corporations.

  • The RIC must meet the holding period requirements of section 901(k) with respect to its common and preferred stock. If the RIC fails to meet these holding period requirements, the election that allows a RIC to pass through to its shareholders the foreign tax credits for foreign taxes paid by the RIC is disallowed. Although the foreign taxes paid may not be taken as a credit by either the RIC or the shareholder, they are still deductible at the fund level.

Election under section 852(g).   In the case of a qualified “fund of funds” structure, a RIC may elect to allow shareholders the foreign tax credit without regard to the requirement that more than 50% of the value of its assets consist of stock or securities in foreign corporations. See section 852(g) for more information.

Reporting requirements.   To make a valid election under section 853 or 852(g), in addition to timely filing Form 1120-RIC and checking the box for Schedule K, item 10 a or b, the RIC must file a statement of election, which includes the information listed under Regulations section 1.853-4(c). The information must be provided on or with a Form 1118, Foreign Tax Credit, attached to the RIC's timely filed tax return.

  For more information, see Regulations section 1.853-4.

Notification to shareholders.

If the RIC makes the election, it must furnish to its shareholders a written notice designating the shareholder's portion of (1) foreign taxes paid by the RIC to foreign countries and possessions of the United States, and (2) the dividend that represents income derived from:

  • sources within countries described in section 901(j), and

  • other foreign-source income.

The notice must be mailed to the shareholders no later than 60 days after the end of the RIC's tax year. For more information, see Regulations section 1.853-3.

Item 11

Election under section 853A.   A RIC can elect to pass through credits from tax credit bonds to its shareholders. If the RIC makes the election, include the interest income from the tax credit bonds on Part I, line 2. Also, increase the dividends paid deduction by the amount of the credits distributed to shareholders. If the RIC makes the election, it is not allowed to take any credits related to the qualified tax credit bonds.

  For more information, see section 853A.

Notification to shareholders.

If the RIC makes the election to apply section 853A, it must furnish to its shareholders a written notice designating the shareholder's proportionate share of: (1) credits from tax credit bonds, and (2) gross income in respect of such credits. The notice must be mailed to the shareholders no later than 60 days after the end of the RIC's tax year.

Schedule L–Balance Sheets per Books

The balance sheets should agree with the RIC's books and records.

Line 1. Cash.   Include certificates of deposit as cash on line 1.

Line 4. Tax-exempt securities.   Include on this line:
  1. State and local government obligations, the interest on which is excludible from gross income under section 103(a), and

  2. Stock in another mutual fund or RIC that distributed exempt-interest dividends during the tax year of the RIC.

Line 24. Adjustments to shareholders' equity.   Examples of adjustments to report on this line include:
  • Unrealized gains and losses on securities held “available for sale.

  • Foreign currency translation adjustments.

  • The excess of additional pension liability over unrecognized prior service cost.

  • Guarantees of employee stock (ESOP) debt.

  • Compensation related to employee stock award plans.

  If the total adjustment to be entered on line 24 is a negative amount, enter the amount in parentheses.

Schedule M–1

Reconciliation of Income (Loss) per Books With Income per Return

Line 5d. Travel and entertainment.   Include on line 5d any of the following:
  • Meals and entertainment not deductible under section 274(n).

  • Expenses for the use of an entertainment facility.

  • The part of business gifts over $25.

  • Expenses of an individual over $2,000, which are allocable to conventions on cruise ships.

  • Employee achievement awards over $400.

  • The cost of entertainment tickets over face value (also subject to the 50% limit under section 274(n)).

  • The cost of skyboxes over the face value of nonluxury box seat tickets.

  • The part of luxury water travel not deductible under section 274(m).

  • Expenses for travel as a form of education.

  • Other nondeductible travel and entertainment expenses.

  For more information, see Pub. 542, Corporations.

Line 7. Tax-exempt interest.   Include as interest on line 7 any exempt-interest dividends received by the RIC as a shareholder in a mutual fund or other RIC.


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