Rev. Rul. 70-597
Rev. Rul. 70-597; 1970-2 C.B. 146
- Cross-Reference
26 CFR 1.851-1: Definition of regulated investment company.
(Also Sections 116, 243, 852, 854; 1.116-1, 1.243-1, 1.852-1,
1.854-1.)
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available
Reconsideration has been given to Revenue Ruling 68-442, C.B. 1968-2, 299, relating to the Federal income tax treatment of a regulated investment company and its shareholders with respect to distributions under the circumstances described below.
The taxpayer, an investment company, is a domestic corporation which, at all times during the taxable year, was registered under the Investment Company Act of 1940, as amended, 15 U.S.C. 80a-1--80b-2, as a management closed-end diversified company. The investment company has two classes of shares (namely, income shares and capital shares) which have a par value of 13x dollars and 10x dollars, respectively. The public offering price per share of each class was 15x dollars. The capitalization of the investment company consists of 15,000,000 shares of each class authorized. All such shares were fully paid for in cash when issued and are nonassessable. Neither class of shareholders has preemptive rights.
The objective of the investment company is growth of capital and income. The investment company intends to invest up to 100 percent of the value of its total assets in common stocks or securities convertible into common stock.
The investment company commenced operations with one-half of its funds provided by sale of income shares and one-half by sale of capital shares. Holders of income shares will receive all of the income from the initial investment portfolio since all net income from portfolio investment will be paid out as dividends to them. Holders of capital shares will obtain the benefits of all of the capital appreciation on the initial investment portfolio since all capital gains will be allocated to them. However, so long as the income shares are outstanding, the investment company will not make any cash distributions on the capital shares except that an amount equal to the investment company's net short-term capital gains may be paid to the holders of the capital shares to the extent that the distribution thereof is necessary to maintain the investment company's qualification as a regulated investment company under the Internal Revenue Code of 1954.
The taxpayer may elect the tax treatment available to regulated investment companies, provided it complies with all the requirements of sections 851 through 855 of the Code and the regulations thereunder. Distribution of 90 percent of the investment company taxable income, including any necessary distributions of net short-term capital gains, will satisfy the requirements of section 852(a)(1) of the Code.
In computing its investment company taxable income, such a regulated investment company is entitled to dividend paid deductions (as defined in section 561 of the Code) under section 852 of the Code with respect to dividends paid to holders of the income shares and also with respect to dividends paid out of net short-term capital gains to holders of the capital shares. No dividends paid deduction is allowed with respect to undistributed capital gains.
Furthermore, the dividends paid with respect to the income shares and those paid out of net short-term capital gains with respect to the capital shares qualify for the $100 dividends received exclusion available to individuals pursuant to section 116 of the Code and the 85 percent deduction for dividends received by corporations as provided in section 243 of the Code, subject to the limitations under section 854 of the Code.
In addition, any undistributed net long-term capital gains that the investment company designates in respect of the capital shares shall be treated in accordance with the provisions of section 852(b)(3)(D) of the Code, which requires the holders of the capital shares, in computing their long-term capital gains, to include the amounts so designated subject to the limitations prescribed, but allows them credit or refund, as the case may be, for the tax imposed on the investment company on such amounts by section 852(b)(3)(A) of the Code.
Revenue Ruling 68-442 is hereby superseded.
- Cross-Reference
26 CFR 1.851-1: Definition of regulated investment company.
(Also Sections 116, 243, 852, 854; 1.116-1, 1.243-1, 1.852-1,
1.854-1.)
- Code Sections
- LanguageEnglish
- Tax Analysts Electronic Citationnot available