In a Revenue Procedure, the IRS has allowed regulated investment companies (RICs) to postpone to 2018 the inclusion of the Code Section 965 transition tax in gross income for purposes of computing their required distributions.

Excise tax

RICs can be any of several financial entities, from mutual fund trade funds to real estate investment trusts or unit investment trusts.

The IRS imposes an excise tax on most RICs for each calendar year. The tax is equal to a nondeductible 4% on undistributed income (the excess of the required distribution for the calendar year over the distributed amount for that year). Included in the calculation of the required distribution is 98% of the RIC’s ordinary income for the calendar year.

The Internal Revenue Code defers to January 1 of the following year ordinary income from “specified gains and losses” that occur after October 31. “Specified gains and losses” is defined as ordinary gains or losses from the sale, exchange, or other disposition of property (including the termination of a position in such property). The term includes any foreign currency gain or loss attributable to investments in a foreign currency and any marketable shares of a passive foreign investment company (PFIC) that are marked to market.

Section 965

The Tax Cuts and Jobs Act (TCJA) levies a transition tax on post-1986 untaxed foreign earnings of specified foreign corporations owned by U.S. shareholders (Code Sec. 965). It does this by deeming those earnings to be repatriated. Under the TCJA, for the last tax year of a deferred foreign income corporation (DFIC) that began before January 1, 2018, subpart F income will be increased by the greater of the corporation’s accumulated post-’86 deferred foreign income determined as of either:

  1. November 2, 2017, or
  2. December 31, 2017.

Code Sec. 965(c) provides a deduction to a U.S. shareholder of a DFIC in the year that the U.S. shareholder has an inclusion because of Code Sec. 965.

An RIC that is a U.S. shareholder of such a DFIC must include in gross income its pro rata share of the DFIC’s subpart F income for its tax year that includes or ends on December 31, 2017. For excise tax purposes, the ordinary-income portion of the required distribution is determined by treating the calendar year as an RIC’s tax year.

The TCJA originally contained provisions that required certain RICs to both compute the amount of a new type of inclusion and make corresponding distributions by December 31, 2017. The IRS received requests for relief from taxpayers who cited the administrative burden of, in a brief amount of time:

  • Obtaining information from a DFIC,
  • Computing the required amounts, and
  • Making the required distributions.

Amounts included in gross income of U.S. shareholders by reason of Code Sec. 965 aren’t specified gains because they aren’t ordinary gains from the sale, exchange or other disposition of property. The inclusions are, however, nonperiodic items of ordinary income required to be computed as of November 2, 2017, and December 31, 2017. Thus, the period during which an RIC could pay dividends in respect of these inclusions ended very shortly after the amendment of Code Sec. 965 and on the same date that the amount of any inclusion could be computed.

IRS decision

The IRS has determined that, in the circumstances described above, it is in the interest of sound tax administration to allow additional time for an RIC to make the required distribution. Thus, following this Revenue Procedure, the IRS won’t challenge an RIC’s treatment of any amount that it would have to include in gross income for its excise tax year if the RIC:

  1. Treats the 2017 inclusion in the same manner as a specified gain that would be properly considered during the portion of the RIC’s 2017 excise tax year that is after October 31, and
  2. Treats any deduction attributable to the 2017 inclusion in the same manner as a specified loss that would typically be properly considered during the same time.

Contact a B&V tax advisor, at 713-667-9147 or, for more information or if you have any questions.

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