RICs THAT FAIL TO QUALIFY FOR ONE TAXABLE YEAR WILL NOT BE CAUGHT IN GENERAL UTILITIES REPEAL WEB.

Notice 88-96

The purpose of this Notice is to provide additional guidance to taxpayers regarding the scope of regulations to be promulgated under section 337(d) of the Internal Revenue Code relating to the taxation of certain built-in gains of regulated investment companies ("RICs").

BACKGROUND

In Notice 88-19, 1988 I.R.B. 14, February 22, 1988, the Internal Revenue Service announced that it intends to promulgate regulations under the authority of section 337(d) to prevent the avoidance of corporate-level taxation with respect to the net built-in gain of C corporation assets in connection with transactions or events that result in the ownership of such assets by a RIC or a real estate investment trust ("REIT") with a basis determined by reference to the C corporation's basis. Notice 88-19 stated that, in the case of a C corporation that qualifies to be taxed as a RIC or a REIT, the regulations will require the C corporation to recognize any net built-in gain that would have been realized if the corporation had liquidated at the end of its last taxable year before the taxable year in which it qualifies to be taxed as a RIC or a REIT.

A number of taxpayers have asked whether the general rule described in Notice 88-19 regarding C corporations that qualify to be taxed as RICs under part I of subchapter M of the Code ("the RIC tax provisions") also applies to a corporation that initially qualifies to be taxed as a RIC for at least one taxable year, then fails to qualify for one taxable year (the "C" year), and requalifies to be taxed as a RIC the next taxable year.

EXCEPTION FOR CERTAIN PREVIOUSLY QUALIFIED CORPORATIONS

The regulations under section 337(d) will provide an exception to the general rule announced in Notice 88-19 for C corporations that qualify to be taxed as RICs in the case of any C corporation that (1) immediately prior to qualifying to be taxed as a RIC was subject to tax as a C corporation for a period not exceeding one taxable year, and (2) immediately prior to being subject to tax as a C corporation was subject to the RIC tax provisions for a period of at least one taxable year. Thus, a previously qualifying RIC that fails to meet the requirements of the RIC tax provisions for a single taxable year will not be required to recognize net built-in gain under section 337 (d) upon requalification. The exception will not apply to any asset that is acquired by the corporation during the C year in a transaction that results in its basis in the asset being determined by reference to a corporate transferor's basis. In addition, the exception will not apply to a corporation that has not previously been subject to the RIC tax provisions. Thus, a newly formed corporation that intends to qualify to be treated as a RIC but which fails to meet the requirements of the RIC tax provisions for its first taxable year will be required to recognize any net built-in gain if it qualifies to be taxed as a RIC for a subsequent taxable year.

ADMINISTRATIVE PRONOUNCEMENT

This document serves as an "administrative pronouncement" as that term is described in section 1.6661-3(b)(2) of the Income Tax Regulations and may be relied upon to the same extent as a revenue ruling or revenue procedure.

FOR FURTHER INFORMATION

For further information contact Robert M. Casey of the Legislation and Regulations Division of the Office of Chief Counsel, Internal Revenue Service, on 202-566-3458 (not a toll-free number).