June 28, 1995
TO: TAX COMMITTEE No. 24-95
RE: ILLINOIS CLARIFIES TAXATION OF REGULATED INVESTMENT
COMPANIES (VOID BY LAWSON)
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Illinois has adopted legislation amending its corporate income tax statute to clarify how
regulated investment companies should compute their Illinois taxable income. Illinois law requires a
RIC to compute its Illinois taxable income by adding back to this federal taxable income any long-term
capital gains realized during a year in excess of its "capital gains dividends" for the year. In a letter ruling
issued last year the Illinois Department of Revenue ruled that the term "capital gains dividends" includes
only amounts actually distributed by a RIC to its shareholders, and not amounts deemed distributed to
shareholders (and taxed directly to shareholders) under section 852(b)(3)(D) of the Internal Revenue
Code. The recent amendment defines "capital gains dividends" to include amounts deemed distributed
as well as actual distributions. This amendment will reduce the capital gains addback for any RIC with
deemed capital gains distributions during a year, and preclude deemed distributions from being taxed at
both the RIC and the shareholder level. The legislation provides that the amendment is "declarative of
existing law," thereby overruling the department's position taken in the 1994 ruling.
We will keep you informed of developments
Peter J. Cinquegrani
Assistant Counsel - Tax