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July 11, 1990
TO: ACCOUNTING/TREASURERS MEMBERS NO. 15-90
TAX MEMBERS NO. 23-90
CLOSED-END FUND MEMBERS NO. 27-90
RE: IRS REVENUE RULING ON CODE SECTION 4982(e)(4) ELECTION
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Attached IRS Revenue Ruling 90-57 clarifies the calculation
of the "required distribution" for purposes of the excise tax
under Internal Revenue Code section 4982 when a regulated
investment company ("RIC") makes an election under Code section
4982(e)(4) to compute its capital gains for the period ending
with its November or December fiscal year-end, rather than for
the period ending October 31, where the election is made in a
year after the first year to which the excise tax applies. The
ruling also defines the first tax year to which the Code section
4982(e)(4) election applies for purposes of the post-October
capital loss rules of Code section 852(b)(3)(C).
Code section 4982 imposes on RIC's an annual 4% excise tax
on the amount by which the "required distribution" for a calendar
year exceeds the "distributed amount". The required distribution
is 98% of the RIC's ordinary income for the calendar year and 98%
of the RIC's capital gain net income for the one-year period
ending October 31 of the calendar year. Code section 4982(e)(4)
allows a RIC with a November 30 or December 31 tax year end to
elect to use that date in determining its capital gain net income
instead of the one-year period ending October 31.
Where an election under Code section 4982(e)(4) is made,
capital gain net income for the first year with respect to which
the election is effective (the "election year") will include
capital gains and losses through November 30 or December 31.
However, for the calendar year prior to the election year, only
capital gains and losses arising on or before October 31 of that
year are taken into account for purposes of Code section 4982.
The ruling holds that the required distribution with respect to
capital gains for the election year will include all gains and
losses realized after October 31 of the year prior to the
election year through either November 30 or December 31 of the
election year, a thirteen or fourteen-month period.
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Code section 852(b)(3)(C) provides that certain post-
October capital losses are not taken into account in determining
the amount a RIC may designate as a capital gain dividend for
that tax year. (See Institute Memorandum to Tax Members No. 7-
90, Closed-End Fund Members No. 7-90 and Accounting/Treasurers
Members No. 6-90, dated February 1, 1990.) Post-October capital
losses are taken into account, however, if an election under Code
section 4982(e)(4) is in effect. Revenue Ruling 90-57 provides
that, for purposes of deciding under Code section 852(b)(3)(c)
whether post-October capital losses are taken into account in
determining the amount a RIC may designate as a capital gain
dividend for the tax year, the first tax year to which an
election under section 4982(e)(4) applies is the first tax year
ending in November (or December) of the year with respect to
which the election is made.
We will keep you informed of developments.
David J. Mangefrida, Jr.
Assistant General Counsel
Attachment