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February 1, 1990
TO: TAX MEMBERS NO. 7-90
CLOSED-END FUND MEMBERS NO. 7-90
ACCOUNTING/TREASURERS MEMBERS NO. 6-90
RE: REGULATIONS UNDER SECTION 852(b)(3)(C)
ON POST-OCTOBER 31 LOSSES
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Code sections 852(b)(3)(C) and 852(b)(8) provide regulatory
authority for the IRS to treat net capital losses, net long-term
capital losses (in the absence of a net capital loss) and net
foreign currency losses arising after October 31 of a regulated
investment company's (RIC's) taxable year (post-October losses)
as arising on the first day of the RIC's next taxable year for
purposes of computing the RIC's taxable income. Post-October 31
capital losses are already treated by section 852(b)(3)(C) as
arising on the first day of the RIC's next taxable year for
capital gain designation purposes.
Regulations under sections 852(b)(3)(C) and 852(b)(8) are
needed, and were requested by the Institute, to permit the proper
interaction between the distribution requirements of the section
4982 excise tax and Subchapter M. (See Institute Memorandum to
Tax Committee No. 16-89, Closed-End Fund Committee No. 43-89, and
Accounting/Treasurers Committee No. 42-89, dated October 6,
1989).
Attached are temporary and proposed regulations which
provide rules relating to the effect of a post-October capital
loss and a post-October currency loss on a RIC's taxable income,
its earnings and profits, and the amount that it may designate as
a capital gain dividend for the taxable year in which the loss is
incurred and the succeeding taxable year. These regulations
apply to taxable years ending after October 31, 1987.
The election prescribed by these regulations for deferring
post-October capital or currency losses to the next taxable year
may be made by the RIC with respect to part or all of such
losses. Any post-October loss deferred pursuant to the election
is treated as arising on the first day of the RIC's next taxable
year for purposes of computing the RIC's taxable income. This
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election has no effect, however, on the amount of the RIC's
income for purposes of the RIC qualification tests under sections
851(b)(2) and 851(b)(3). Special rules are provided depending
upon whether the entire amount or only part of any such loss is
deferred until the next taxable year.
The regulations also provide rules for determining earnings
and profits. Under the general rule, a RIC's current earnings
and profits for a taxable year are determined without regard to
any post-October loss for that year, but a post-October loss is
generally taken into account in determining the RIC's accumulated
earnings and profits. If a RIC elects to defer part or all of a
post-October loss in computing its taxable income, however, the
amount of loss deferred is taken into account in determining the
RIC's current earnings and profits and accumulated earnings and
profits as if the part of the loss so deferred had arisen on the
first day of the succeeding taxable year.
The election to defer post-October losses shall be made by
completing the income tax return in accordance with the
applicable instructions. Until the instructions are available,
however, the RIC may make the election by entering the
appropriate amounts on its tax return and attaching an
explanatory written statement.
A special transition rule is provided for any taxable year
ending before March 2, 1990 in which a RIC incurred a post-
October loss. Under this rule, the RIC may use any reasonable
method that is consistently applied to determine the amounts of
income and loss taken into account in that taxable year and the
succeeding year.
A retroactive election may also be made for a taxable year
with respect to which a RIC filed its income tax return on or
before May 1, 1990. To make this retroactive election, the RIC
must file an amended tax return for the taxable year (and for any
succeeding year for which a return has already been filed)
reflecting the appropriate amounts and by attaching an
explanatory written statement to the return. The deadline for
making a retroactive election is December 31, 1990.
A retroactive dividend may be paid by any RIC making a
retroactive election. A RIC shall include the amount of any
retroactive dividend paid in computing its deduction for
dividends paid for the year to which the retroactive dividend
relates. A retroactive dividend must be declared with respect to
a taxable year on or before the date a retroactive election is
made for that year and must be paid (or treated as paid) on or
before December 31, 1990. The regulations provide certain
limitations on the amount of retroactive dividends.
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The comment period for these regulations expires on April
2, 1990. Please contact the undersigned at (202) 955-3585 by
March 16, 1990 if you would like the Institute to file comments
on these regulations.
We will keep you informed of developments.
Keith D. Lawson
Assistant General Counsel
Attachment
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