July 1, 1992
TO: TAX COMMITTEE NO. 25-92
RE: MEMORANDUM ON MERGERS OF C CORPORATIONS INTO RICs
__________________________________________________________
As you may know, the Internal Revenue Service (Service)
announced at a meeting of the American Bar Association’s
Regulated Investment Company Committee of the Tax Section that it
was considering issuing a ruling, with possible retroactive
effect, that would require a regulated investment company (RIC)
which merged with a C corporation to distribute any C corporation
earnings and profits acquired in the merger no later than the end
of the tax year in which the merger occurred. The Service has
also announced in its Business Plan for 1992 that such a ruling
is a goal of the Service by the end of the year. (See Institute
Memorandum to Tax Committee No. 22-92 and Accounting/Treasurers
Committee No. 26-92, dated June 9, 1992.)
Failure to distribute all C corporation earnings and
profits would cause the RIC to fail the requirement of Internal
Revenue Code section 852(a)(2). That section requires that a RIC
either have been qualified as a RIC for all taxable years ending
on or after November 8, 1983 (the grandfather rule) or, as of the
close of its tax year, have no C corporation earnings and
profits. The Service is considering adopting an interpretation
of the grandfather rule which would require not only the RIC but
all companies merging into the RIC to have been RICs for all tax
years ending on or after November 8, 1983 in order for the
grandfather rule to apply.
The enclosed memorandum, which has been sent to the
Internal Revenue Service and the Treasury Department, argues that
there is no support for the Service’s position in the legislative
history which added Code section 852(a)(2). Alternatively, the
memorandum states that any restrictions which are placed on
mergers of C corporations into RICs should be prospective only.
We will keep you informed of further developments.
David J. Mangefrida Jr.
Assistant Counsel - Tax
Attachment