On December 22, 2010, President Obama signed into law the Regulated Investment Company Modernization Act of 2010, which amends the Internal Revenue Code to modify certain rules governing the taxation of regulated investment companies (“RICs”). Among other provisions, the Act:
- permits RICs an unlimited carryforward of their net capital losses;
- adds savings provisions for failures of RICs to satisfy the RIC gross income and asset tests;
- modifies the rules for designating and allocating RIC capital gain dividends;
- permits certain nondeductible items of income to be included in a RIC’s earnings and profits calculations;
- allows qualified funds-of-funds to pass through to their shareholders tax-exempt interest and foreign tax credits, without regard to certain investment limitations;
- modifies the rules relating to spillover dividends, return of capital distributions and stock redemptions;
- repeals the preferential dividend rule for publicly offered RICs;
- permits RICs to defer certain late-year losses; and
- modifies certain excise tax and penalty rules applicable to RICs, including increasing a RIC’s required capital gain distribution to avoid excise tax from 98% to 98.2%.
The Act does not include a provision that was included in the original bill that would have allowed income from commodities to be treated as qualifying income for purposes of the RIC gross income test.
The provisions of the Act are generally effective for taxable years of a RIC beginning after December 22, 2010.