Tax Preparation Help  
Instructions for Form 1120-RIC 2006 Tax Year

General Instructions

This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Purpose of Form

Use Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies, to report the income, gains, losses, deductions, credits, and to figure the income tax liability of a regulated investment company (RIC) as defined in section 851.

Who Must File

A domestic corporation that meets certain conditions (discussed below) must file Form 1120-RIC if it elects to be treated as a RIC for the tax year (or has made an election for a prior tax year and the election has not been terminated or revoked). The election is made by computing taxable income as a RIC on Form 1120-RIC.

General Requirements To Qualify as a RIC

The term “regulated investment company” applies to any domestic corporation that:

  • Is registered throughout the tax year as a management company or unit investment trust under the Investment Company Act of 1940 (ICA),

  • Has an election in effect under the ICA to be treated as a business development company, or

  • Is a common trust fund or similar fund that is neither an investment company under section 3(c)(3) of the ICA nor a common trust fund as defined under section 584(a).

Other Requirements

In addition, the RIC must meet the income test, the asset test, and the distribution requirements explained below.

The income test:   At least 90% of its gross income must be derived from the following items:
  • Dividends,

  • Interest (including tax-exempt interest income),

  • Payments with respect to securities loans (as defined in section 512(a)(5)),

  • Gains from the sale or other disposition of stock or securities (as defined in ICA section 2(a)(36)) or foreign currencies,

  • Other income (including gains from options, futures, or forward contracts) derived from the RIC's business of investing in such stock, securities, or currencies, and

  • Net income derived from an interest in a qualified publicly traded partnership (as defined in section 851(h)).

    Income from a partnership or trust qualifies under the 90% test to the extent the RIC's distributive share of such income is from items described above as realized by the partnership or trust.

    Income that a RIC receives in the normal course of business as a reimbursement from its investment advisor is qualifying income for purposes of the 90% test if the reimbursement is includible in the RIC's gross income.

The asset test:   
  1. At the end of each quarter of the RIC's tax year, at least 50% of the value of its assets must be invested in the following items.

    • Cash and cash items (including receivables),

    • Government securities,

    • Securities of other RICs, and

    • Securities of other issuers, except that the investment in a single issuer of securities may not exceed 5% of the value of the RIC's assets or 10% of the outstanding voting securities of the issuer (except as provided in section 851(e)).

  2. At the end of each quarter of the RIC's tax year, no more than 25% of the value of the RIC's assets may be invested in the securities of:

    • A single issuer (excluding government securities or securities of other RICs),

    • Two or more issuers controlled by the RIC and engaged in the same or related trades or businesses, or

    • One or more qualified publicly traded partnerships as defined in section 851(h).

    See sections 851(b)(3) and 851(c) for further details.

Distribution requirements.   The RIC's deduction for dividends paid for the tax year (as defined in section 561, but without regard to capital gain dividends) equals or exceeds the sum of:
  • 90% of its investment company taxable income determined without regard to section 852(b)(2)(D); and

  • 90% of the excess of the RIC's interest income excludable from gross income under section 103(a) over its deductions disallowed under sections 265 and 171(a)(2).

  
not satisfying the distribuiton requirements will make the RIC subject to taxation as a C
A RIC that does not satisfy the distribution requirements will be subject to taxation as a C corporation.

Earnings and profits.   The RIC must either have been a RIC for all tax years ending after November 7, 1983, or, at the end of the current tax year, had no accumulated earnings and profits from any non-RIC tax year.

For this purpose, current year distributions are treated as made from the earliest earnings and profits accumulated in any non-RIC tax year. See section 852(c)(3). Also see section 852(e) for procedures that may allow the RIC to avoid disqualification for the initial year if the RIC did not meet this requirement.

Definition of a Fund

The term “fund” refers to a separate portfolio of assets, whose beneficial interests are owned by the holders of a class or series of stock of the RIC that is preferred over all other classes or series for that portfolio of assets.

When To File

Generally, a RIC must file its income tax return by the 15th day of the 3rd month after the end of its tax year. A new RIC filing a short period return must generally file by the 15th day of the 3rd month after the short period ends. A RIC that has dissolved must generally file by the 15th day of the 3rd month after the date of dissolution.

If the due date falls on a Saturday, Sunday, or legal holiday, the RIC may file its return on the next business day.

Private delivery services

RICs can use certain private delivery services designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns and payments.

These private delivery services include only the following.

  • DHL Express (DHL): DHL Same Day Service, DHL Next Day 10:30 am, DHL Next Day 12:00 pm, DHL Next Day 3:00 pm, and DHL 2nd Day Service.

  • Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.

  • United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The private delivery service can tell you how to get written proof of the mailing date.

Private delivery services cannot deliver to PO boxes.  Use USPS.
Private delivery services cannot deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an IRS P.O. box address.

Extension of time to file

To request an extension of time to file, file Form 7004, Application for Automatic 6-Month Extension of Time To File Certain Business Income Tax, Information, and Other Returns, where you file your return. Generally, file Form 7004 by the regular due date of the return.

File the RIC's return at the applicable IRS address listed below.

If the RIC's principal business, office, or agency is located in: And the total assets at the end of the tax year (Form 1120-RIC, page 1, item D) are: Use the following Internal Revenue Service Center address:
Connecticut, Delaware, District of Columbia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, West Virginia, Wisconsin


Less than $10 million



$10 million or more



Cincinnati, OH 45999-0012



Ogden, UT 84201-0012
Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Washington, Wyoming Any amount Ogden, UT 84201-0012

A group of corporations with members located in more than one service center area will often keep all the books and records at the principal office of the managing corporation. In this case, file the tax returns with the service center for the area in which the principal office of the managing corporation is located.

Who Must Sign

The return must be signed and dated by:

  • The president, vice president, treasurer, assistant treasurer, chief accounting officer or

  • Any other corporate officer (such as tax officer) authorized to sign.

If a return is filed on behalf of a RIC by a receiver, trustee or assignee, the fiduciary must sign the return, not the corporate officer.

If this return is being filed for a series fund (as defined in section 851(g)(2)), the return may be signed by any officer authorized to sign for the RIC in which the fund is a series.

If an employee of the RIC completes Form 1120-RIC, the paid preparer's space should remain blank. A preparer who does not charge the RIC to prepare Form 1120-RIC should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill in the “Paid Preparer's Use Only” area.

The paid preparer must complete the required preparer information and:

  • Sign the return in the space provided for the preparer's signature.

  • Give a copy of the return to the corporation.

A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.

Paid Preparer Authorization

If the RIC wants to allow the IRS to discuss its 2006 tax return with the paid preparer who signed the return, check the “Yes” box in the signature area. This authorization applies only to the individual whose signature appears in the “Paid Preparer's Use Only” section of the RIC's return. It does not apply to the firm, if any, shown in that section.

If the “Yes” box is checked, the RIC is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The RIC is also authorizing the paid preparer to:

  • Give the IRS any information that is missing from the return,

  • Call the IRS for information about the processing of the return or the status of any related refund or payment(s), and

  • Respond to certain IRS notices about math errors, offsets, and return preparation.

The RIC is not authorizing the paid preparer to receive any refund check, bind the RIC to anything (including any additional tax liability), or otherwise represent the RIC before the IRS.

The authorization will automatically end no later than the due date (excluding extensions) for filing the RIC's 2007 tax return. If the RIC wants to expand the paid preparer's authorization or revoke the authorization before it ends, see Pub. 947, Practice Before the IRS and Power of Attorney.

Other Forms That May Be Required

In addition to Form 1120-RIC, the RIC may have to file some of the following forms. Also see Pub. 542, Corporations, for an expanded list of forms the RIC may be required to file.

Form 1096,    Annual Summary and Transmittal of U.S. Information Returns. Use Form 1096 to transmit Forms 1099 and 5498 to the Internal Revenue Service.

Form 1099-DIV,   Dividends and Distributions. Report certain dividends and distributions.

Form 1099-INT,   Interest Income. Report interest income.

Form 2438,   Undistributed Capital Gains Tax Return. If the RIC designates undistributed capital gains under section 852(b)(3)(D), it must file this return and pay tax on the gains designated by the 30th day after the end of the RIC's tax year. In addition, a copy of Form 2438 (with Copy A of all Forms 2439) must be attached to Form 1120-RIC when filed.

Form 2439,   Notice to Shareholder of Undistributed Long-Term Capital Gains. If the RIC filed Form 2438, it must complete Form 2439 for each shareholder for whom it paid tax on undistributed capital gains and furnish a copy to the shareholder by the 60th day after the end of the RIC's tax year.

Form 8613,   Return of Excise Tax on Undistributed Income of Regulated Investment Companies. If the RIC is liable for the 4% excise tax on undistributed income under section 4982 or makes an election under section 4982(e)(4), it must file this return for the calendar year.

Form 8886,   Reportable Transaction Disclosure Statement. File Form 8886 if the RIC or an investment vehicle that is at least 95% owned by one or more RICs at all time during the course of a transaction participated in a listed transaction. Listed transactions include transactions that are the same as or substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. These transactions are identified by notice, regulation, or other form of published guidance in the I.R.B. as a listed transaction.

  See the instructions for Form 8886 for more details on the conditions that apply to determine if a RIC participated in a listed transaction and needs to file this form.

Reportable transactions by material advisors.   Until further guidance is issued, material advisors who provide material aid, assistance, or advice with respect to any reportable transaction, must use Form 8264, Application for Registration of a Tax Shelter, to disclose reportable transactions in accordance with interim guidance provided in Notice 2004-80, 2004-50 I.R.B. 963; Notice 2005-17, 2005-8 I.R.B. 606; and Notice 2005-22, 2005-12 I.R.B. 756.

Statements

Safe harbor under Temporary Regulations section 1.67-2T(j)(2)

Generally, shareholders in a nonpublicly offered fund that are individuals or pass-through entities are treated as having received a dividend in an amount equal to the shareholder's allocable share of affected RIC expenses for the calendar year. They are also treated as having paid or incurred an expense described in section 212 (and subject to the 2% limitation on miscellaneous itemized deductions) in the same amount for the calendar year.

Election.   A nonpublicly offered fund may elect to treat its affected RIC expenses for a calendar year as equal to 40% of the amount determined under Temporary Regulations section 1.67-2T(j)(1)(i) for that calendar year.

   To make this election, attach to Form 1120-RIC for the tax year that includes the last day of the calendar year for which the fund makes the election a statement that it is making an election under Temporary Regulations section 1.67-2T(j)(2). Once made, the election remains in effect for all subsequent calendar years and may not be revoked without IRS consent. See Temporary Regulations section 1.67-2T for definitions and other details.

Notice to shareholders

A RIC must notify its shareholders within 60 days after the close of its tax year of the distribution made during the tax year that qualifies for the dividends-received deduction under section 243. For purposes of the dividends-received deduction, a capital gain dividend received from a RIC is not treated as a dividend. The capital gain dividend is treated as a long-term capital gain by the shareholder.

Consent to partnership election to close its books monthly

Certain money market funds that obtain an interest in an eligible partnership that invests in assets exempt from taxation under section 103 may be qualified to pay exempt-interest dividends to their shareholders. To qualify for payment of exempt-interest dividends, a RIC must meet the quarterly net asset value (NAV) requirements under section 852(b)(5). To maintain the required NAV at the end of each quarter, the RIC may take into account on a monthly basis its distributive share of partnership items if the eligible partnership makes a proper election to close its books at the end of each month. See Rev. Proc. 2002-16 for details.

Eligibility.   A RIC is entitled to take into account its distributive share of partnership items on a monthly basis if:
  • The RIC is entitled to hold itself out as a money market fund, or an equivalent of a money market fund.

  • The RIC provides a statement to the partnership that it consents to the partnership's election to close its books monthly and that the RIC will include in its taxable income its distributive share of partnership items in a manner consistent with the election. See Rev. Proc. 2002-16 for the required contents of the statement of consent.

  • The RIC provides the statement of consent to the custodian or manager of the partnership by the last day of the second month after the month in which the RIC acquires the partnership interest.

  • The partnership is eligible under Rev. Proc. 2002-16 to make the monthly closing election and the election is effective by the second month after the month in which the RIC acquires the partnership interest.

Statement of consent.   The consent to a partnership's monthly closing election is effective for the month in which the RIC acquires the partnership interest, unless the RIC requests that the consent be effective for either of the two immediately following calendar months. In addition to timely providing the partnership with the statement of consent, the statement should be filed with Form 1120-RIC for the first tax year in which the consent is effective. The monthly closing consent (and the partnership's election) may be revoked only with the consent of the Commissioner. However, the RIC's consent becomes ineffective on any day when the RIC ceases to be an eligible partner and the partnership's monthly closing election is terminated as of the first day of any month the partnership is no longer eligible for the election under Rev. Proc. 2002-16. For more details, see the Revenue Procedure.

Assembling the Return

To ensure that the RIC's tax return is correctly processed, attach all schedules and other forms after page 4, Form 1120-RIC, in the following order.

  1. Schedule N (Form 1120).

  2. Schedule O (Form 1120).

  3. Form 4626.

  4. Form 4136.

  5. Additional schedules in alphabetical order.

  6. Additional forms in numerical order.

Complete every applicable entry space on Form 1120-RIC. Do not enter “See attached” instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Enter the RIC's name and EIN on each supporting statement or attachment.

Accounting Methods

Figure taxable income using the method of accounting regularly used in keeping the RIC's books and records. In all cases, the method used must clearly reflect taxable income.

Permissible methods include:

  • Cash,

  • Accrual, or

  • Any other method authorized by the Internal Revenue Code.

Accrual method

Generally, a RIC must use the accrual method of accounting if its average annual gross receipts exceed $5 million. For more details, see section 448(c).

Mark-to-market accounting method

Generally, dealers in securities must use the mark-to-market accounting method described in section 475. Under this method, any security that is inventory to the dealer must be held at its fair market value (FMV).

Any security held by a dealer that is not inventory and held at the close of the tax year is treated as sold at its FMV on the last business day of the tax year. Any resulting gain or loss must be taken into account that year in determining gross income. The gain or loss taken into account is generally treated as ordinary gain or loss.

For details, including exceptions, see section 475, the related regulations, and Rev. Rul. 94-7, 1994-1 C.B. 151.

Dealers in commodities and traders in securities and commodities may elect, with some exceptions, to use the mark-to-market accounting method. To make the election, the RIC must file a statement describing the election, the first tax year the election is to be effective, and in the case of an election for traders in securities or commodities, the trade or business for which the election is made. Except for new taxpayers, the statement must be filed by the due date (not including extensions) of the income tax return for the tax year immediately preceding the election year and attached to that return, or if applicable, to a request for an extension of time to file that return. For more details, see Rev. Proc. 99-17, 1999-1 C.B. 503, and sections 475(e) and (f).

Change in accounting method

To change its method of accounting, the RIC must file Form 3115, Application for Change in Accounting Method. For more information, see Form 3115.

Accounting Periods

A RIC must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a RIC uses to keep its records and report its income and expenses. RICs can use a calendar year or a fiscal year.

For more information about accounting periods, see Regulations sections 1.441-1 and 1.441-2.

Change of tax year

Generally, a RIC must get the consent of the IRS before changing its tax year. To obtain the consent, file Form 1128, Application To Adopt, Change, or Retain a Tax Year. However, under certain conditions, a RIC may change its tax year without getting the consent.

For more information on change of tax year, see Form 1128 and Regulations section 1.442-1.

Rounding Off to Whole Dollars

A RIC may round off cents to whole dollars on its return and schedules. If the RIC does round to whole dollars, it must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 cents to 99 cents to the next dollar (for example, $1.39 becomes $1 and $2.50 becomes $3).

If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

Recordkeeping

Keep the RIC's records for as long as they may be needed for administration of any provision of the Internal Revenue Code. Usually, records that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Keep records that verify the RIC's basis in property for as long as they are needed to figure the basis of the original or replacement property.

The RIC should keep copies of all filed returns. They help in preparing future and amended returns.

Depository Methods of Tax Payment

A RIC must pay the tax due in full no later than the 15th day of the 3rd month after the end of the tax year. The two methods of depositing corporate income taxes are discussed below.

Electronic Deposit Requirement

The RIC must make electronic deposits of all depository taxes (such as employment tax, excise tax, and corporate income tax) using the Electronic Federal Tax Payment System (EFTPS) in 2007 if:

  • The total deposits of such taxes in 2005 were more than $200,000 or

  • The RIC was required to use EFTPS in 2006.

If the RIC is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the RIC is not required to use EFTPS, it may participate voluntarily.

To enroll in or get more information about EFTPS, call 1-800-555-4477 or visit www.eftps.gov.

Depositing on time.   For EFTPS deposits to be made timely, the RIC must initiate the transaction at least one business day before the date the deposit is due.

Deposits With Form 8109

If the RIC does not use EFTPS, deposit RIC income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon. If you do not have a preprinted Form 8109, use Form 8109-B to make deposits. You can get this form by calling 1-800-829-4933 or visiting an IRS taxpayer assistance area. Be sure to have your EIN ready when you call.

Do not send deposits directly to an IRS office; otherwise, the RIC may have to pay a penalty. Mail or deliver the completed Form 8109 with the payment to an authorized depositary (such as a commercial bank or other financial institution authorized to accept federal tax deposits). Make checks or money orders payable to the depositary.

If the RIC prefers, it may mail the coupon and payment to Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Make the check or money order payable to “Financial Agent.

To help ensure proper crediting, enter the RIC's EIN, the tax period to which the deposit applies, and “Form 1120-RIC” on the check or money order. Darken the “1120” box under “Type of Tax” and the appropriate “Quarter” box under “Tax Period” on the coupon. Records of these deposits will be sent to the IRS.

For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Pub. 583, Starting a Business and Keeping Records.

Caution
If the RIC owes tax when it files Form 1120-RIC, do not include the payment with the tax return. Instead, mail or deliver the payment with Form 8109 to an authorized depositary or use EFTPS, if applicable.

Estimated Tax Payments

The RIC must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more.

If the RIC must pay estimated taxes, see Form 1120-W, Estimated Tax for Corporations.

Interest and Penalties

Interest.   Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction understatements from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Late filing of return.   A RIC that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. The penalty will not be imposed if the RIC can show that the failure to file on time was due to reasonable cause. Attach a statement explaining the reasonable cause.

Late payment of tax.   A RIC that does not pay the tax when due generally may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the RIC can show that the failure to pay on time was due to reasonable cause.

Trust fund recovery penalty.   This penalty may apply if certain income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on Form 720, Quarterly Federal Excise Tax Return, Form 941, Employer's Quarterly Federal Tax Return, or Form 945, Annual Return of Withheld Federal Income Tax. The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the Instructions for Form 720, or Pub. 15 (Circular E), Employer's Tax Guide, for details, including the definition of responsible persons.

Other penalties.   Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements, and fraud. See sections 6662, 6662A and 6663.

Previous | Index | Next

2006 Instructions Main | 2006 Tax Help Archives | Tax Help Archives Main | Home