HR 4337 modernizes tax code treatment of investment firms

A new white paper from Wolters Kluwer Law & Business details the elements of the law.

The Regulated Investment Company Modernization Act of 2010 this fall, which is now headed to President Obama’s desk for an expected signature, will

  • Reduce the burden arising from amended year-end tax information statements
  • Improve a mutual fund’s ability to meet its distribution requirements
  • Create remedies for inadvertent mutual fund qualification failures
  • Improve the tax treatment of investments in a fund-of-funds structure
  • Update the tax treatment of fund capital losses

according to a new white paper from Wolters Kluwer Law & Business, which produces information products under the CCH and Aspen names.

Specifically, the legislation:

§ Creates a special rule allowing unlimited carryovers of the net capital losses of regulated investment companies.

§ Exempts regulated investment companies from loss of tax-preferred status and additional taxes for failure to satisfy the gross income and assets tests if that failure is de minimis and is due to reasonable cause and not willful neglect.

§ Revises the definitions of “capital gain dividend” and “exempt-interest dividend” for purposes of the taxation of funds and their shareholders to require that dividends be reported to shareholders in written statements.

§ Allows a qualified fund of funds to pay exempt-interest dividends and allow its shareholders the foreign tax credit without regard to certain requirements that the fund of funds invest in state and local bonds or foreign securities.

§ Modifies rules for dividends paid by funds after the close of a taxable year (so- called spillover dividends).

§ Revises the method for allocating fund earnings and profits to require those earnings and profits to be allocated first to distributions made prior to December 31 of a calendar year.

§ Allows funds with shares that are redeemable on demand to treat distributions in redemption of stock as an exchange for income-tax purposes.

§ Excludes net capital losses of funds from earnings and profits.

§ Prohibits earnings and profits from being reduced by any amount that is not

      allowable as a deduction in computing taxable income, except with respect to a

      net capital loss.

§ Repeals preferential dividend rules for funds that are publicly offered

§ Allows funds to elect to treat a post-October capital loss and any late-year

      ordinary loss as arising on the first day of the following taxable year.

§ Exempts from holding-period requirements regular dividends paid by a fund that

      declares exempt-interest dividends on a daily basis in an amount equal to at least

      90 percent of its net tax-exempt interest and distributes those dividends at least


§ Extends the exemption from excise tax of failure to distribute taxable income of a

      fund to other tax-exempt entities with an ownership interest in a fund.

§ Allows specified gains and losses of a fund derived after October 31 to be

      deferred, for excise-tax purposes, until January 1 of the following calendar year

§ Creates a special rule for estimated excise-tax payments of funds.

§ Increases from 98 percent to 98.2 percent the amount of capital gain net income

      funds must distribute.

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