The U.S. Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9851) concerning the income test used to determine whether a corporation may qualify as a regulated investment company (RIC) for federal income tax purposes.
The final regulations [PDF 236 KB] provide guidance to corporations that intend to qualify as RICs, and adopt regulations proposed in 1960 as well as finalize—with certain clarifications or changes—a notice of proposed rulemaking that was proposed in 2016. The final regulations are generally effective on the date of publication in the Federal Register, scheduled for March 19, 2019.
The preamble to the final regulations explains the following clarifications or changes have been adopted.
…the Non-qualifying Income Proposal creates an unintended effect on the RIC income test of section 851(b)(2). For example, certain types of income, such as interest and dividends, would be considered qualifying income if earned directly by a RIC. These types of income, however, would not be qualifying income when received by a controlled foreign corporation or PFIC and included in a RIC’s income under section 951(a)(1) or 1293(a), unless there is a corresponding distribution.
In the 2016 notice of proposed rulemaking, the Treasury Department and IRS also requested comments as to whether Rev. Rul. 2006-1 and Rev. Rul. 2006-31 should be withdrawn. Commenters recommended that these rulings should not be withdrawn “…because RICs rely on those rulings to invest with confidence in certain derivatives on stocks and securities.” After consideration of the comments, the Treasury Department and IRS decided not to withdraw these revenue rulings “at this time.”
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