1 See Institute Memorandum to Accounting/Treasurers Members No. 15-94,
Closed-End Fund Committee No. 14-94 and Tax Members No. 25-94, dated June 10,
1994.
2 Also attached is a copy of Rev. Rul. 94-40, marked to show the
modifications made by Rev. Rul. 94-40A.
June 21, 1994
TO: ACCOUNTING/TREASURERS MEMBERS NO. 18-94
CLOSED-END FUND COMMITTEE NO. 17-94
TAX MEMBERS NO. 28-94
RE: IRS REVISES RULING ON RIC INVESTMENTS IN PARTNERSHIPS
__________________________________________________________
As we previously informed you, on June 10 the IRS issued
Revenue Ruling 94-40 regarding 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.1
The Institute recently telephoned and met with officials at
the Treasury Department and the IRS to express industry concerns
with the revenue ruling. First, the ruling requires that a RIC
be treated as receiving its share of the partnership's income for
purposes of the minimum distribution excise tax rules but does
not, by its terms, provide the RIC with the earnings and profits
it needs to distribute the income and eliminate its excise tax
liability. Second, the ruling contains language suggesting that
a RIC must apply its tax accounting rules, such as the section
852(b)(9) rule for accruing dividend income on the ex-dividend
date, as if the RIC held directly its share of the partnership's
assets.
We are pleased to inform you that today the IRS released the
attached modification (Revenue Ruling 94-40A) to Revenue Ruling
94-40.2 This modified ruling addresses the industry's second
concern. As noted in the revised ruling, some taxpayers have
interpreted language in the ruling regarding a RIC's obligation
to take into account its share of partnership items of income,
gain, loss and deduction to mean that, for excise tax purposes, a
RIC's methods of accounting override the methods of accounting of
a partnership in which the RIC is a partner.
The revised ruling states that IRS did not intend this
result. Accordingly, Rev. Rul. 94-40A modifies Rev. Rul. 94-40
to provide that the partnership's methods of accounting will
control in determining the income that the RIC must take into
account for minimum distribution purposes.
We will keep you informed of developments.
Keith D. Lawson
Associate Counsel - Tax
Attachments