Alert October 05, 2010

House Passes Bill Amending Tax Code Provisions Affecting Regulated Investment Companies

The House of Representatives has passed the Investment Company Modernization Act of 2010 (H.R. 4337), which was originally introduced in the House at the end of 2009.  The Act would modify a number of Internal Revenue Code provisions applicable to regulated investment companies (RICs) to:

  • allow RICs to carry forward their net capital losses indefinitely (while modifying the treatment of RIC loss carryovers to be similar to the current treatment applicable to individuals)
  • allow RICs to treat income (including gain from sale) from direct investments in commodities or derivatives on commodities as qualifying income for purposes of the 90% gross income test
  • add new savings provisions for a RIC’s failure to satisfy the asset diversification tests and add savings provisions for gross income test failures
  • repeal the preferential dividend rule for publicly traded RICs
  • require RICs to “report” their capital gain dividends and certain other dividends in a written statement furnished to shareholders (such as the IRS Form 1099), instead of “designating” such dividends
  • allow fund of funds to pass through exempt-interest dividends and foreign tax credits to shareholders as long as the upper-tier fund invests at least 95% of the value of its total assets in other RICs
  • modify rules relating to spillback dividends, with the effect of generally extending the due date for such dividends
  • clarify the tax treatment of redemptions by shareholders in publicly traded RICs
  • allow a RIC to take into account in earnings and profits calculations its net capital loss carryforwards and tax-exempt interest-related expenses
  • allow a RIC to elect to “push” forward to the first day of the next taxable year all or part of any late-year capital losses and certain late-year ordinary losses (with such an election applying for all purposes of the Code)
  • amend certain provisions relating to the excise taxes and penalties payable by RICs.

The provisions of the Act generally would apply for taxable years beginning after the date of enactment.  The Senate has taken no action on the Act other than placing it on the Senate Legislative Calendar.