June 10, 1994
TO: ACCOUNTING/TREASURERS MEMBERS NO. 15-94
CLOSED-END FUND COMMITTEE NO. 14-94
TAX MEMBERS NO. 25-94
RE: IRS RULING CONCERNING REGULATED INVESTMENT COMPANY
INVESTMENTS IN PARTNERSHIPS
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Today, the IRS issued the attached revenue ruling (Revenue
Ruling 94-40) clarifying the application of the excise tax
minimum distribution rules of Internal Revenue Code section 4982
to a regulated investment company ("RIC") holding an interest in
a partnership. The ruling states that a RIC partner in a
partnership must determine its required distribution under
section 4982 by taking into account its share of partnership gain
or loss as if the RIC had owned directly its share of the
partnership's assets. The ruling applies to all RIC partnership
investments, including RICs organized as feeder funds in master-
feeder structures.
The ruling applies beginning with calendar year 1994. As a
result of issuing the ruling, the IRS has indicated that it will
now resume issuing rulings on master-feeder structures.
Ordinarily, a partner includes in income its share of the
partnership's income on the last day of the partnership fiscal
year. The ruling modifies that rule by accelerating a RIC's
recognition of income for section 4982 purposes to the date the
income would be recognized if received directly by the RIC. The
ruling states, however, that for purposes of determining the
RIC's earnings and profits, a RIC that is a partner in a
partnership continues to take into account its share of the
partnership's income on the last day of the partnership's fiscal
year. If the RIC's taxable year is different from the
partnership's year end, the RIC could have income for purposes of
the section 4982 required distribution rule but not have earnings
and profits to support a distribution.
Announcement 94-84, which accompanied the ruling, asks for
comments concerning whether there should be excepts to the
application of Revenue Ruling 94-40 for small investments in
partnerships. The Announcement seeks comments on how such a de
minimis rule should be structured and whether it should be
elective. Comments on the issue must be received by August 11,
1994.
Please contact the undersigned at (202) 326-5837 with any
suggestions for Institute comments by July 8, 1994.
Peter J. Cinquegrani
Assistant Counsel - Tax
Attachment