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Law Firms Examine the New Fund Tax Law

As we reported in our December 20, 2010 post, "RIC Modernization Act Passed by Congress," new tax legislation aimed directly at registered investment companies (RICs) has been signed by President Obama, and will modify mutual fund tax regulations for the first time in more than 20 years.  The legislation, among other things, does the following:

  • Modifies the Gross Income Test to cure inadvertent failures to comply by paying a tax equal to the amount by which the RIC failed the good income test;
  • Modifies the Asset Qualification Test to provide a cure for unintentional de minimis diversification test failures acted on within six months of failing the test;
  • Permit RICs an unlimited carryforward of their net capital losses;
  • Modifies rules for allocating RIC capital gain dividend distributions; 
  • Includes certain nondeductible items of RIC income in earnings and profit calculations; 
  • Allows funds of funds to pass through to their shareholders tax-exempt interest and foreign tax credits, without regard to certain investment limitations; 
  • Modifies rules relating to the declaration of RIC dividends, return of capital distributions, and stock redemptions; 
  • Allows certain RICs with shares that are redeemable upon demand to treat distributions in redemption of stock as an exchange of fund shares or a dividend for tax purposes; 
  • Allows a deferral of end-of-year losses of RICs; and 
  • Modifies excise tax and penalty rules applicable to RICs

Delving into the new tax provisions, the Dechert and Drinker Biddle law firms have produced client memoranda outlining in much more detail the what the RIC Modernization Act does, and how it will affect mutual funds going forward.  These publications provide interesting background and coverage of the new provisions, and will help fund directors get up to speed on the topic.

Drinker Biddle's publication, "RIC Tax Measures Enacted," may be found at: http://www.drinkerbiddle.com/files/Publication/0c05d460-bc3c-416e-b731-2fec41133b4d/Presentation/PublicationAttachment/3bd82d45-c1d7-425b-b644-3d2209b6cb39/RIC_Tax_Liberalization.pdf

Dechert's publication, "An Analysis of the Registered Investment Company Modernization Act of 2010," may be found at: http://www.dechert.com/library/FS_1_1-11_Analysis_of_the_Regulated_Investment_Company.pdf