Client Alert

Congress Passes Tax Legislation Affecting Regulated Investment Companies

December 20, 2010

Joseph P. Opich, Marcia Persaud & Matt Walding

The Regulated Investment Company Modernization Act of 2010 (the Act) was passed by Congress on December 15, 2010 and sent to President Obama for signature. The provisions of the Act are summarized below. The Act will provide significant relief and flexibility for registered investment companies that intend to qualify for the beneficial tax treatment granted to regulated investment companies (RICs) under Subchapter M of the Internal Revenue Code of 1986, as amended, as well as for their advisors and administrators. In anticipation of the implementation of the Act, RICs should review the new rules and consider whether strategic or practical changes may be in order, particularly with respect to:

  • Dividend reinvestment plan discounts and fee and expense allocation arrangements (in light of the repeal of the preferential dividend prohibition);

  • Capital loss planning (including the potential to increase tax-free returns of capital to shareholders by maximizing capital loss utilization);

  • Pass-through of tax-exempt interest income and foreign tax credits in a RIC fund of funds structure; and

  • Simplified reporting requirements for distributions to shareholders.

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