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RIC Modernization Act Passed by Congress

Congress has passed the Regulated Investment Company Modernization Act of 2010, and the bill will move to the President for his signature.  As we reported in our September 30, 2010 post, Mutual Fund Tax Bill Wins Approval in House, the bill would modify mutual fund tax regulations for the first time in more than 20 years. The legislation, sponsored by Charles Rangel (D-NY) and Richard Neal (D-MA.), is intended to improve the efficiency of funds' investment structures and reduce disproportionate tax consequences for inadvertent errors on funds' tax returns.

There is one notable change from the bill to the final legislation, however.  The bill language would effectively have lifted the restrictions on mutual fund investments in commodities.  The final language of the bill leaves out the proposed changes allowing RICs to derive qualifying income from investments in commodities, including foreign currencies, thus leaving the treatment as it has been for the past 20 years.  

The bill, 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

The full text of the Regulated Investment Company Modernization Act of 2010: is available at:  http://thomas.loc.gov/home/gpoxmlc111/h4337_eas.xml

A summary of the final bill's most important provisions is available from Ropes & Gray at: http://www.ropesgray.com/files/upload/20101210TaxAlert.pdf