RIC Modernization Act of 2010: President Signs Legislation Designed to Simplify and Update the Rules Relating to Regulated Investment Companies

Sullivan & Cromwell LLP - December 23, 2010

On Wednesday, December 22, 2010, the President signed into law the Regulated Investment Company Modernization Act of 2010, H.R. 4337 (the “Act”). The Act does not include the provision of previously proposed legislation that would have treated gains from investing in commodities as qualifying income for purposes of the income test that must be met by a regulated investment company (a “RIC”), but does make a number of changes that are intended to modernize the tax laws governing RICs, including the following:

  • Repeal of the “preferential” dividend rule for publicly offered RICs;
  • Elimination of the current eight-year limit on the use of capital loss carryforwards and allowance of RIC capital losses to carry forward indefinitely as either short-term losses or long-term losses;
  • Remedial provisions similar to those available to real estate investment trusts for failures to satisfy the gross income or gross asset tests;
  • The pass-through of exempt-interest dividends and foreign tax credits in fund-of-fund structures;
  • The inapplicability of the loss deferral rules for sales among members of a controlled group of corporations to certain redemptions of RIC stock in fund-of-fund structures;
  • Clarification that redemptions by publicly-traded RICs of shares redeemable upon demand are sales or exchanges, not dividends; and
  • Extension of the class of tax-exempt shareholders that may hold shares of a RIC that is exempt from the excise tax imposed on RICs.