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Tax Insights, March 15, 2017
RICs Granted Consent to Revoke Capital Gain Net Income Election

March 15, 2017

RICs Granted Consent to Revoke Capital Gain Net Income Election
In similar rulings (201709017 and 201709018), the IRS concluded that a regulated investment company’s (RIC) desire to revoke its election under Section 4982(e)(4)(A) is because of administrative burdens and not because of any federal tax-related financial burden caused by the election; the RIC does not seek to revoke its election for the purpose of preserving or securing a federal tax benefit; and the RIC will neither benefit through hindsight nor prejudice the interests of the government as a result of being permitted to revoke its election (section references are to the Internal Revenue Code of 1986, as amended). (Under Section 4982(e)(4)(A), if a RIC has a tax year that ends on Nov. 30 or Dec. 31 and it makes an election, then, with the consent of the IRS, the requirement that it distribute 98.2 percent of its capital gain net income – and the calculation of capital gain net income – can be met on the basis of the RIC’s actual tax year instead of the one-year period ending on Oct. 31.) As a result, the IRS ruled that pursuant to Section 4982(e)(4)(B), the RIC may revoke the election made by it under Section 4982(e)(4)(A). In addition, in calculating the RIC’s required distribution for the calendar year in which the revocation is effective, for purposes of Sections 4982(b)(1) and (e)(2), the capital gain net income will be determined on the basis of the capital gains and losses realized and recognized during the period beginning on the first day of its taxable year preceding the revocation year through Oct. 31 of the revocation year.

IRS Rules on Distribution of REIT’s Cash, Common Stock
In Private Letter Ruling 201709011, the IRS ruled that the cash and common stock distributed by a real estate investment trust to its shareholders with respect to its common stock will be treated as a distribution of property with respect to the common stock to which Section 301 applies and that the amount of the distribution of the stock received by any holder of common stock electing to or otherwise receiving stock will be considered to equal the amount of money which could have been received instead under Treasury Regulations Section 1.305-1(b)(2).

Basis to Be Determined on Property-by-Property Basis
In Private Letter Ruling 201709001, the IRS ruled the computation of basis under the bargain sale rules of Section 1011(b) is determined on a property-by-property basis if a parent corporation (treated as an S corporation) causes several of its wholly owned subsidiaries to donate certain business properties subject to mortgage debt to a Section 501(c)(3) corporation.

IRS Updates Publication on REMICs
The IRS has released an updated version of Publication 938 (rev. February 2017), “Real Estate Mortgage Investment Conduits (REMICs) Reporting Information (And Other Collateralized Debt Obligations (CDOs)),” which provides directories relating to real estate mortgage investment conduits and collateralized debt obligations.

ABA Members Propose Changes to Debt Instrument Modification Regulations
The American Bar Association submitted recommendations to clarify and simplify the rules for determining whether a debt modification will be treated as a significant modification resulting in a deemed debt-for-debt exchange under Treasury Regulations Section 1.1001-3 and to address certain of the tax consequences resulting from such a deemed exchange. The comments include 25 recommendations rated by importance. Certain high-rated comments include revising the definition of “modification” by clarifying that only changes to the local law legal rights and entitlements relating to a debt instrument (and not changes that occur solely for purposes of tax law) are considered modifications, and clarifying how the change in yield test in Treasury Regulations Section 1.1001-3(e)(2)(ii) applies when the original debt instrument was issued with de minimis OID.

Bahamas-U.S. FATCA IGA Competent Authority Arrangement Available
The Bahamian and U.S. competent authorities have signed an arrangement under the two countries’ 2014 intergovernmental agreement to implement FATCA.

Pa. Governor Releases Fiscal 2018 Budget Calling for Combined Reporting and CNI Reductions
Pennsylvania Gov. Tom Wolf (D) released his Executive 2017-2018 Budget. It includes a recommendation to adopt combined reporting in conjunction with corporate net income (CNI) tax rate reductions beginning in the 2019 tax year to reduce the CNI rate to 6.49 percent by 2022. The budget also includes proposals designed to “impose a competitively structured severance tax on natural gas, close loopholes so all insurers are taxed consistently, establish uniform Net Operating Loss provisions, eliminate special interest tax loopholes, and convert tax credit incentives into a block grant.” An Executive Budget in Brief was also released.

Information contained in this publication should not be construed as legal advice or opinion or as a substitute for the advice of counsel. The articles by these authors may have first appeared in other publications. The content provided is for educational and informational purposes for the use of clients and others who may be interested in the subject matter. We recommend that readers seek specific advice from counsel about particular matters of interest. 

Copyright © 2017 Stradley Ronon Stevens & Young, LLP. All rights reserved.

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