Instructions for Form 1120-RIC |
2006 Tax Year |
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.
File the 2006 return for calendar year 2006 and fiscal years that begin in 2006. For a fiscal year return, fill in the tax
year space at the top of
the form.
Note.
The 2006 Form 1120-RIC may also be used if:
The RIC must show its 2007 tax year on the 2006 Form 1120-RIC and take into account any tax law changes that are effective
for tax years
beginning after December 31, 2006.
Type or print the RIC's true name (as set forth in the charter or other legal document creating it) and address on the appropriate
lines. Include
the suite, room, or other unit number after the street address. If the post office does not deliver mail to the street address
and the RIC has a P.O.
box, show the box number instead.
If the RIC receives its mail in care of a third party (such as an accountant or an attorney), enter on the street address
line “C/O” followed
by the third party's name and street address or P.O. box.
Item B. Date RIC Was Established
If this return is being filed for a series fund (as described in section 851(g)(2)), enter the date the fund was created.
Otherwise, enter the date
the RIC was incorporated or organized.
Item C. Employer Identification Number (EIN)
Enter the RIC's EIN. If the RIC does not have an EIN, it must apply for one. An EIN may be applied for:
-
Online—Click on the EIN link at
www.irs.gov/businesses/small. The EIN is issued immediately once the application information is
validated.
-
By telephone at 1-800-829-4933 from 7:00 a.m. to 10:00 p.m. in the RIC's local time zone.
-
By mailing or faxing Form SS-4, Application for Employer Identification Number.
If the RIC has not received its EIN by the time the return is due, write “Applied for” and the date you applied in the space for the EIN. See
the Instructions for Form SS-4 for details.
Enter the RIC's total assets (as determined by the accounting method regularly used in keeping the fund's books and records)
at the end of the tax
year. If there are no assets at the end of the tax year, enter -0-.
Item E. Final Return, Name Change, Address Change, or Amended Return
Note.
If a change in address occurs after the return is filed, use Form 8822, Change of Address, to notify the IRS of the new address.
-
If this is the RIC's final return, file Form 1120-RIC and check the “Final return” box.
-
If the RIC has changed its name since it last filed a return, check the box for “Name change.” Generally, a RIC must also have amended
its articles of incorporation and filed the amendment with the state in which it was incorporated.
-
If the RIC has changed its address since it last filed a return (including a change to an “in care of” address), check the box for
“Address change.”
-
If the RIC is amending its return, check the box for “Amended return,” complete the entire return, correct the appropriate lines with
the new information, and refigure the RIC's tax liability. Attach a statement that explains the reason for the amendments
and identifies the lines
being changed on the amended return.
Part I—Investment Company Taxable Income
Line 1. Dividends.
A RIC that is the holder of record of any share of stock on the record date for a dividend payable on that stock must
include the dividend in gross
income by the later of: the date the share became ex-dividend, or the date the RIC acquired the share.
Line 2. Interest.
Enter taxable interest on U.S. obligations and on loans, notes, mortgages, bonds, bank deposits, corporate bonds,
tax refunds, etc.
Do not offset interest expense against interest income. Special rules apply to interest income from certain below-market-rate
loans. See section
7872 for more information on the tax treatment of loans on which inadequate or no interest is charged.
Note.
Report tax-exempt interest income on Schedule K, item 8. Also, if required, include the same amount on Schedule M-1, line
7.
Line 3. Net Foreign Currency Gain or (Loss) from Section 988 Transactions.
Enter the net foreign currency gain (loss) from section 988 transactions treated as ordinary income or loss under
section 988(a)(1)(A). Attach a
schedule detailing each separate transaction.
Line 4. Payments with respect to securities loans.
Enter the amount received or accrued from a broker as compensation for securities loaned by the RIC to the broker
for use in completing market
transactions. The payments must meet the requirements of section 512(a)(5).
Line 5. Excess of Net Short-Term Capital Gain Over Net Long-Term Capital Loss.
Enter the amount from Schedule D (Form 1120), line 12. Every sale or exchange of a capital asset must be reported
in detail on Schedule D (Form
1120), even if no gain or loss is indicated.
Line 7. Other Income.
Enter any other taxable income (loss) not reported on lines 1 through 6, except net capital gain reported in Part
II. List the type and amount of
income on an attached schedule. If the RIC has only one item of other income, describe it in parentheses on line 7. Examples
of other income to report
on line 7 include:
-
Gross rents.
-
Recoveries of fees or expenses in settlement or litigation.
-
Amounts received or accrued as consideration for entering into agreements to make real property loans or to purchase or lease
real
property.
-
Recoveries of bad debts deducted in prior years under the specific charge-off method.
-
Refunds of taxes deducted in prior years to the extent they reduced income subject to tax in the year deducted (see section
111). Do not
offset current year taxes against prior year tax refunds.
-
The recapture amount under section 280F if the business use of listed property drops to 50% or less. To figure the recapture
amount,
complete Part IV of Form 4797.
-
Ordinary income from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset
ordinary losses
against ordinary income. Instead, include the losses on line 22. Show the partnership's name, address, and EIN on a separate
statement attached to
this return. If the amount entered is from more than one partnership, identify the amount from each partnership.
-
Any net positive section 481 income adjustment. See Form 3115 and its instructions for more information.
Limitations on Deductions
Transactions between related taxpayers.
Generally, an accrual basis taxpayer may only deduct business expenses and interest owed to a related party in the
year the payment is includible
in the income of the related party. See section 267 for limitations on deductions for interest and expenses paid to a related
party.
Golden parachute payments.
A portion of the payments made by a RIC to key personnel that exceeds their usual compensation may not be deductible.
This occurs when the RIC has
an agreement (golden parachute) with key employees to pay them an amount substantially in excess of their base amount if control
of the RIC changes.
See section 280G and Regulations section 1.280G-1 for more information.
Business start-up and organizational expenses.
Business start-up and organizational costs must be capitalized unless an election is made to deduct or amortize them.
The RIC can elect to amortize
costs paid or incurred before October 23, 2004, over a period of 60 months or more. However, for costs paid or incurred after
October 22, 2004, the
following rules apply (separately to each category):
-
The RIC can elect to deduct up to $5,000 of such costs for the year the RIC begins business operations.
-
The $5,000 deduction is reduced (but not below zero) by the amount the total costs exceed $50,000. If the total costs are
$55,000 or more,
the deduction is reduced to zero.
-
If the election is made, any costs not deducted must be amortized ratably over a 180-month period beginning with the month
the RIC begins
business operations.
For more details on the election for business start-up costs and organizational costs, see Pub. 535, Business Expenses.
To make the election, attach the statements required by Regulations sections 1.195-1 and 1.248-1(c). Report the deductible
amount of these costs
and any amortization on line 22. For amortization that begins during the tax year, complete and attach Form 4562.
Section 265(a)(3) limitation.
If the RIC paid exempt-interest dividends during the tax year (including those dividends deemed paid under section
855), no deduction is allowed
for that portion of otherwise deductible expenses allocable to tax-exempt income. The excluded amount is determined by the
amount tax-exempt income
bears to total gross income (including tax-exempt income but excluding capital gain net income).
Net operating loss deduction.
The net operating loss deduction is not allowed.
Passive activity limitations.
Limitations on passive activity losses and credits under section 469 apply to RICs that are closely held (as defined
in section 469(j)(1)). RICs
subject to the passive activity limitations must complete Form 8810, Corporate Passive Activity Loss and Credit Limitations,
to compute their
allowable passive activity loss and credit. Before completing Form 8810, see Temporary Regulations section 1.163-8T, for rules
on allocating interest
expense among activities.
Closely held corporation.
A RIC is closely held if at any time during the last half of the tax year more than 50% in value of its outstanding
stock is directly or indirectly
owned by or for not more than five individuals and it is not a personal service corporation.
Line 9. Compensation of Officers.
Complete Schedule E if total receipts are $500,000 or more. Total receipts are figured by adding:
-
Line 8, Part I,
-
Net capital gain from line 1, Part II, and
-
Line 9a, Form 2438.
Do not include compensation deductible elsewhere on the return, such as elective contributions to a section 401(k)
cash or deferred arrangement, or
amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.
Include only the deductible part of officers' compensation on Schedule E. Complete Schedule E, columns (a) through
(e), for all officers. The RIC
determines who is an officer under the laws of the state where incorporated.
Disallowance of deduction for employee compensation in excess of $1 million.
Publicly held corporations may not deduct compensation to a “ covered employee” to the extent that the compensation exceeds $1 million.
Generally, a covered employee is:
-
The chief executive officer (or an individual acting in that capacity) as of the end of the tax year; or
-
An employee whose total compensation must be reported to shareholders under the Securities Exchange Act of 1934 because the
employee is
among the four highest compensated officers for that tax year (other than the chief executive officer).
For this purpose, compensation does not include:
-
Income from certain employee trusts, annuity plans, or pensions.
-
Any benefit paid to an employee that is excluded from the employee's income.
The deduction limit does not apply to:
-
Commissions based on individual performance;
-
Qualified performance-based compensation; and
-
Income payable under a written, binding contract in effect on February 17, 1993.
The $1 million limit is reduced by amounts disallowed as excess parachute payments under section 280G.
For details, see section 162(m) and Regulations section 1.162-27.
Line 10. Salaries and Wages.
Enter the salaries and wages paid for the tax year, reduced by the amount claimed on:
-
Line 2, section A and Line 6, Section B of Form 5884-A, Credits for Employers Affected by Hurricane Katrina, Rita, or Wilma,
-
Line 2 of Form 8844, Empowerment zone and renewal community employment credit,
-
Line 2 of Form 5884, Work Opportunity Credit;
-
Line 4 of Form 8845, Indian Employment Credit; and
-
Line 2 of Form 8861, Welfare-to-Work Credit.
See the instructions for these forms for more information.
Do not include salaries and wages deductible elsewhere on the return, such as elective contributions to a section
401(k) cash or deferred
arrangement, or amounts contributed under a salary reduction SEP agreement or a SIMPLE IRA plan.
If the RIC provided taxable fringe benefits to its employees, such as personal use of a car, do not deduct as wages any amounts
deducted elsewhere.
Line 11. Rents.
If the RIC rented or leased a vehicle, enter the total annual rent or lease expense paid or incurred during the year.
Also, complete Part V of Form
4562, Depreciation and Amortization. If the RIC leased a vehicle for a term of 30 days or more, the deduction for the vehicle
lease expense may have
to be reduced by an amount called the inclusion amount.
The RIC may have an inclusion amount if:
The lease term began: |
And the vehicle's FMV on the first day of the lease exceeded: |
After 12/31/04 but before 1/1/07
|
$15,200
|
After 12/31/03 but before 1/1/05
|
$17,500
|
If the lease term began before January 1, 2002, see Pub. 463, Travel, Entertainment, Gift, and Car
Expenses, to find out if the RIC has an inclusion amount. The inclusion amount for lease terms beginning in 2007 will be published
in the Internal
Revenue Bulletin in early 2007.
|
See Pub. 463 for instructions on figuring the inclusion amount.
Line 12. Taxes and Licenses.
Enter taxes paid or accrued during the tax year, but do not include the following:
-
Federal income taxes (except for the tax imposed on net recognized built-in gain allocable to ordinary income).
-
Foreign or U.S. possession income taxes if a foreign tax credit is claimed, or if the RIC made an election under section 853.
-
Excise taxes imposed under section 4982 on undistributed RIC income.
-
Taxes not imposed on the RIC.
-
Taxes, including state or local sales taxes, that are paid or incurred in connection with an acquisition or disposition of
property (these
taxes must be treated as a part of the cost of the acquired property or, in the case of a disposition, as a reduction in the
amount realized on the
disposition).
-
Taxes assessed against local benefits that increase the value of the property assessed (such as for paving, etc.).
-
Taxes deducted elsewhere on the return.
See section 164(d) for apportionment of taxes on real property between seller and purchaser.
Line 13. Interest
Interest expense cannot be used to offset interest income.
Interest allocation.
The RIC must make an interest allocation if the proceeds of a loan were used for more than one purpose (for example,
to purchase a portfolio
investment and to acquire an interest in a passive activity). See Temporary Regulations section 1.163-8T for the interest
allocation rules.
The following interest is not deductible:
-
Interest on indebtedness incurred or continued to purchase or carry obligations if the interest is wholly exempt from income
tax. For
exceptions, see section 265(b).
-
For cash basis taxpayers, prepaid interest allocable to years following the current tax year.
-
Interest and carrying charges on straddles. Generally, these amounts must be capitalized. See section 263(g).
Special rules apply to:
-
Interest on which no tax is imposed (see section 163(j)).
-
Original issue discount on certain high-yield discount obligations (see section 163(e)(5)(C) to figure the disqualified
portion).
-
The deduction for interest when the RIC is a policyholder or beneficiary with respect to a life insurance, endowment, or annuity
contract
issued after June 8, 1997. For details, see section 264(f). Attach a statement showing the computation of the deduction.
Line 14. Depreciation.
Include on line 14 the part of the cost that the RIC elected to expense under section 179 for certain property placed
in service during tax year
2006 or carried over from 2005. See Form 4562 and its instructions to figure the amount of depreciation to enter on this line.
Line 22. Other Deductions
Penalties or fines paid to any government agency or instrumentality because of a violation of a law are not deductible. See
Chapter 11, Other
Expenses, in Publication 535 for additional information.
Attach a schedule listing by type and amount all allowable deductions that are not specifically deductible elsewhere
on the return. Generally, a
deduction may not be taken for any amount that is allocable to tax-exempt income. See section 265(b) for exceptions.
Examples of other deductions include:
-
Amortization. See Form 4562.
-
Certain business start-up and organizational costs the RIC elects to amortize or deduct.
-
Supplies used and consumed in the business.
-
Utilities.
-
Ordinary losses from trade or business activities of a partnership (from Schedule K-1 (Form 1065 or 1065-B)). Do not offset
ordinary income
against ordinary losses. Instead, include the income on line 7. Show the partnership's name, address, and EIN on a separate
statement attached to this
return. If the amount is from more than one partnership, identify separately the amount from each partnership.
-
Any extraterritorial income exclusion (from Form 8873, line 54).
-
Any net negative section 481(a) adjustment.
Charitable contributions.
Enter contributions or gifts actually paid within the tax year to or for the use of charitable and governmental organizations
described in section
170(c) and any unused contribution carryovers.
RICs reporting taxable income on the accrual method may elect to treat as paid during the tax year any contributions
paid by the 15th day of the
3rd month after the end of the tax year if the contributions were authorized by the board of directors during the tax year.
Attach a declaration to
the return that includes the date the resolution was adopted.
Limitation on deduction.
The total amount claimed cannot be more than 10% of taxable income computed without regard to the following:
-
Any deduction for contributions.
-
The special deductions on line 25, relating to dividends paid.
-
The deduction allowed under section 249, relating to any premium paid or incurred upon the repurchase of a convertible bond.
Carryover.
Charitable contributions over the 10% limitation cannot be deducted for the tax year but may be carried over to the
next 5 tax years subject to
certain limitations.
For more information on charitable contributions, including substantiation and recordkeeping requirements, see the
regulations under section 170
and Pub. 526, Charitable Contributions.
Contributions to organizations conducting lobbying activities.
Contributions made to an organization that conducts lobbying activities are not deductible if:
-
The lobbying activities relate to matters of direct financial interest to the donor's trade or business and
-
The principal purpose of the contribution was to avoid federal income tax by obtaining a deduction for activities that would
have been
nondeductible under the lobbying expense rules if conducted directly by the donor.
For information on contributions to charitable organizations that conduct lobbying activities, see section 170(f)(9).
Pension, profit-sharing, etc., plans.
Report contributions to qualified pension, profit-sharing, or other funded-deferred compensation plans. Employers
who maintain such a plan
generally must file Form 5500, Annual Return/Report of Employee Benefit Plan, even if the plan is not a qualified plan under
the Internal Revenue
Code. The filing requirement applies even if the RIC does not claim a deduction for the current tax year. There are penalties
for failure to file
these forms on time and for overstating the pension plan deduction. See sections 6652(e) and 6662(f).
Travel, meals, and entertainment.
Subject to certain limitations and restrictions, the RIC can deduct ordinary and necessary travel, meals, and entertainment
expenses incurred in
its trade or business.
Travel.
The RIC cannot deduct travel expenses of any individual accompanying a corporate officer or employee unless:
Meals and entertainment.
Generally, the RIC can deduct only 50% of the amount otherwise allowable for meals and entertainment expenses paid
or incurred in its trade or
business.
Amounts treated as compensation.
Generally, the RIC may be able to deduct otherwise nondeductible entertainment, amusement or recreation expenses if
the amounts are treated as
compensation to the recipient and reported on Form W-2 for an employee or on Form 1099-MISC for an independent contractor.
However, if the recipient is an officer, director, or beneficial owner (directly or indirectly) of more than 10% of
any class of stock, the
deductible expense is limited. See section 274(e)(2) and Notice 2005-45, 2005-24 I.R.B. 1228.
See section 274 and Pub. 463 for a more extensive discussion of these topics.
Lobbying expenses.
Generally, lobbying expenses are not deductible. Examples of non-deductible expenses include:
-
Amounts paid or incurred in connection with influencing federal or state legislation (but not local legislation) or
-
Amounts paid or incurred in connection with any communication with certain federal executive branch officials in an attempt
to influence the
official actions or positions of the officials. See Regulations section 1.162-29 for the definition of “influencing legislation.”
Dues and other similar amounts paid to certain tax-exempt organizations may not be deductible. See section 162(e)(3).
Certain in-house lobbying
expenditures that do not exceed $2,000 are deductible.
For more information on other deductions that may apply to RICs, see Pub. 535.
Line 28b. Estimated tax payments.
Enter any estimated tax payments the RIC made for the tax year.
Line 28f. Credit from Form 2439.
Enter the credit from Form 2439 for the RIC's share of the tax paid by another RIC or a REIT on undistributed long-term
capital gains included in
the RIC's income. Attach Form 2439 to Form 1120-RIC.
Line 28g. Credit for federal tax on fuels.
Complete and attach Form 4136, Credit for Federal Tax Paid on Fuels, if the RIC qualifies to take this credit.
Line 28h. Credit for federal telephone excise tax paid.
If the RIC was billed after February 28, 2003, and before August 1, 2006, for the federal telephone excise tax on
long distance or bundled service,
the RIC may be able to request a credit for the tax paid. The RIC had bundled service if its local and long distance service
was provided under a plan
that does not separately state the charge for local service. The RIC cannot request the credit if it has already received
a credit or refund from its
service provider. If the RIC requests the credit, it cannot ask its service provider for a credit or refund and must withdraw
any request previously
submitted to its provider.
The RIC can request the credit by attaching Form 8913, Credit for Federal Telephone Excise Tax Paid, showing the actual
amount the RIC paid. The
RIC also may be able to request the credit based on an estimate of the amount paid. See Form 8913 for details. In either case,
the RIC must keep
records to substantiate the amount of the credit requested.
Backup withholding.
If the RIC had income tax withheld from any payments it received, because, for example, it failed to give the payer
its correct EIN, include the
amount withheld in the total for line 28i. Show the amount withheld in the blank space in the right-hand column between lines
27 and 28i, and enter
“ Backup Withholding.”
Line 29. Estimated tax penalty.
A RIC that does not make estimated tax payments when due may be subject to an underpayment penalty for the period
of underpayment. See the
instructions for Form 2220, Underpayment of Estimated Tax by Corporations for more information.
Schedule A—Deduction for Dividends Paid
Column (a)
is used to determine the deduction for dividends paid resulting from income derived from ordinary dividends.
Column (b)
is used to determine the deduction for dividends paid resulting from income derived from capital gain dividends.
Section 561 (taking into account sections 852(b)(7), 852(c)(3)(B), and 855(a)) determines the deduction for dividends
paid. Do not take into
account exempt-interest dividends defined in section 852(b)(5) or any amount reported for the tax year on Form 2438, line
9b. See Regulations section
1.852-11 for information on post-October currency or capital losses.
Line 3.
Dividends, both ordinary and capital gain, declared and payable to shareholders of record in October, November, or
December are treated as paid by
the RIC and received by each shareholder on December 31 of that calendar year provided that they are actually paid in January
of the following
calendar year. Enter on line 3 all such dividends not already included on line 1 or 2.
Line 5.
Enter the foreign tax paid deduction allowed as an addition to the dividends paid deduction under section 853(b)(1)(B).
See the instructions for
Item 10 of Schedule K for information on the election available under section 853(a).
Schedule B—Income From Tax-Exempt Obligations
If, at the close of each quarter of the tax year, at least 50% of the value of the fund's assets consisted of tax-exempt obligations
under section
103(a), the RIC qualifies under section 852(b)(5) to pay exempt-interest dividends for the tax year.
If this applies, check the “Yes” box on line 1 and complete lines 2 through 5. See section 852(b)(5)(A) for the definition of exempt-interest
dividends and other details.
Schedule J—Tax Computation
A member of a controlled group must check the box on line 1 and complete and attach Schedule O (Form 1120). See Schedule O
and its instructions for
more information.
Line 2a-Tax on Investment Company Taxable Income
Members of a controlled group must use Schedule O (Form 1120) to figure the tax for the group. Most corporations not filing
a consolidated return
figure their tax by using the Tax Rate Schedule below.
For a RIC that is not a personal holding company (PHC).
A RIC in compliance with Regulations section 1.852-6 regarding disclosure of the RIC's actual stock ownership (members
of a controlled group should
see the instructions for Schedule O (Form 1120)) is not a PHC and should compute its tax using the Tax Rate Schedule below:
Tax Rate Schedule
If the investment company taxable income
(line 26, page 1) is: |
Over— |
But not over— |
Tax is: |
Of the amount over— |
$0
|
$50,000
|
15% |
$0
|
50,000
|
75,000
|
$ 7,500 + 25% |
50,000
|
75,000
|
100,000
|
13,750 + 34% |
75,000
|
100,000
|
335,000
|
22,250 + 39% |
100,000
|
335,000
|
10,000,000
|
113,900 + 34% |
335,000
|
10,000,000
|
15,000,000
|
3,400,000 + 35% |
10,000,000
|
15,000,000
|
18,333,333
|
5,150,000 + 38% |
15,000,000
|
18,333,333
|
—
|
35% |
0
|
For a RIC that is a personal holding company.
A RIC that is not in compliance with Regulations section 1.852-6 is a PHC and is taxed at a flat rate of 35% on its
investment company taxable
income.
Line 2c-Alternative Minimum Tax (AMT)
Unless the RIC is treated as a small corporation exempt from the AMT, it may owe the AMT if it has any of the adjustments
and tax preference items
listed on Form 4626, Alternative Minimum Tax—Corporations. The RIC must file Form 4626 if its investment company taxable income
(or loss), and
retained capital gains not designated under section 852(b)(3)(D), plus adjustments and tax preference items, is more than
the smaller of:
See Form 4626 for definitions and details on how to figure the tax.
Apportioning tax preference items.
Items of tax preference may be apportioned by the RIC between the entity and its shareholders in accordance with IRC
59(d)(1)(A).
Deferred tax under section 1291.
If the RIC was a shareholder in a passive foreign investment company (PFIC), and received an excess distribution or
disposed of its investment in
the PFIC during the year, it must include the increase in taxes due under section 1291(c)(2) in the total for line 2d. On
the dotted line to the left
of line 2d write “ Section 1291” and the amount.
Do not include on line 2d any interest due under section 1291(c)(3). Instead, if this applies, show the amount of
interest owed in the bottom
margin of page 1 and write “ Section 1291 interest.” For details, see Form 8621, Return by a Shareholder of a Passive Foreign Investment Company
or Qualified Electing Fund.
Additional tax under section 197(f).
A RIC that elects to pay tax on the gain from the sale of an intangible under the related person exception to the
anti-churning rules should
include any additional tax due under section 197(f)(9)(B) in the total for line 2d. On the dotted line to the left of line
2d, write “ Section
197” and the amount.
Line 3a- Foreign Tax Credit
To find out when a RIC can claim the credit for payment of income tax to a foreign country or U.S. possession, see Form 1118,
Foreign Tax
Credit—Corporations. The RIC may not claim this credit if an election under section 853 was made for the tax year. See Election under
section 853(a), under Schedule K, Item 10.
If the RIC can claim the QEV credit, discussed below, check the box and include the amount of the credit in the total for
line 3b.
Qualified electric vehicle (QEV) credit.
Use Form 8834, Qualified Electric Vehicle Credit, if the RIC can claim a credit for the purchase of a qualified electric
vehicle placed in service
in 2006.
Line 3c-General Business Credit
Enter on line 3c the RIC's total general business credit.
If the RIC is filing Form 8844, Empowerment Zone and Renewal Community Employment Credit, check the “Form(s)” box, enter 8844 in the space
provided, and include the allowable credit on line 3c.
If the RIC is required to file Form 3800, General Business Credit, check the “Form 3800” box and include the allowable credit on line 3c. If
the RIC is not required to file Form 3800, check the “Form(s)” box, write the form number in the space provided, and include on line 3c the
allowable credit from the applicable form.
Minimum tax credit.
To figure the minimum tax credit and any carryforward of that credit, use Form 8827, Credit for Prior Year Minimum
Tax—Corporations.
Line 5- Personal Holding Company Tax
A RIC is taxed as a personal holding company under section 542 if:
-
At least 60% of its adjusted ordinary gross income for the tax year is personal holding company income, and
-
At any time during the last half of the tax year more than 50% in value of its outstanding stock is owned, directly or indirectly,
by five
or fewer individuals.
See the Instructions for Schedule PH (Form 1120), U.S. Personal Holding Company (PHC) Tax, for definitions and details on
how to figure the tax.
Include any of the following taxes and interest in the total on line 6. Check the appropriate box(es) for the form, if any,
used to compute the
total.
Recapture of Investment Credit.
If the RIC disposed of investment credit property or changed the property's use before the end of its useful life
or recovery period, it may owe a
tax. See Form 4255, Recapture of Investment Credit, for details.
Recapture of Low-Income Housing Credit.
If the RIC disposed of property (or there was a reduction in the qualified basis of the property) for which it took
the low-income housing credit,
it may owe a tax. See Form 8611, Recapture of Low-Income Housing Credit, and IRC section 42(j)(1) for more information.
Other.
Additional tax and interest amounts can be included in the total entered on line 6. Check the box for “ Other” if the RIC includes any of the
taxes and interest discussed below. See How to report, below, for details on reporting these amounts on an attached schedule.
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Recapture of qualified electric vehicle credit. The RIC must recapture part of the QEV credit it claimed in a prior year if,
within 3 full
years of the date the vehicle was placed in service, it ceases to qualify for the credit. See Regulations section 1.30-1 for
details on how to figure
the recapture.
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Recapture of Indian employment credit. Generally, if an employer terminates the employment of a qualified employee less than
1 year after
the date of initial employment, any Indian employment credit allowed for a prior tax year because of wages paid or incurred
to that employee must be
recaptured. For details, see Form 8845 and section 45A.
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Recapture of new markets credit (see Form 8874 and Regulations section 1.45D-1(e) for details).
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Recapture of employer-provided childcare facilities and services credit (see Form 8882 and section 45F(d) for details).
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Interest due on deferred gain recognition (section 1260(b)).
How to report.
If the RIC checked the “ Other” box, attach a schedule showing the computation of each item included in the total for line 6, Schedule J;
identify the applicable code section and the type of tax or interest.
Built-in gains tax. (See worksheet).
If, on or after January 2, 2002, property of a C corporation becomes property of a RIC by either (a) the qualification
of the C corporation as a
RIC or (b) the transfer of such property to a RIC, then the RIC will be subject to the built-in gains tax under section 1374
unless the C corporation
elects deemed sale treatment on the transferred property. If the C corporation does not make this election, the RIC must pay
tax on the net recognized
built-in gain during the 10-year period beginning on its first day as a RIC or the day it acquired the property. Recognized
built-in gains and losses
generally retain their character (for example, ordinary income or capital gain) and are treated the same as other gains or
losses of the RIC. The
RIC's tax on net recognized built-in gain is treated as a loss sustained by the RIC after October 31 of the same tax year
(see the instructions for
line i of the Built-in Gains Tax Worksheet on page 12). See Regulations section 1.337(d)-7 for details.
Different rules apply to elections to be a RIC and to transfers of property in a carryover basis transaction that
occurred prior to January 2,
2002. For RIC elections and property transfers before this date, the C corporation is subject to deemed sale treatment on
the transferred property
unless the RIC elects section 1374 treatment. See Regulations section 1.337(d)-6 for information on how to make the election
and figure the tax for
RIC elections and property transfers before this date. The RIC may also rely on Regulations section 1.337(d)-5 for RIC elections
and property
transfers that occurred before January 2, 2002.
Worksheet instructions. Complete the worksheet on page 12 to figure the built-in gains tax under Regulations section 1.337(d)-7 or
1.337(d)-6.
Line a.
Enter the amount that would be the taxable income of the RIC for the tax year if only recognized built-in gain, recognized
built-in loss, and
recognized built-in gain carryover were taken into account.
Line b.
Add the amounts shown on page 1, line 24; Part II, line 1; and Form 2438, line 11. For this purpose, refigure line
24 on page 1 without regard to
any election under section 852(b)(2)(F). Enter the result on line b of the worksheet.
Line c.
The RIC's net unrealized built-in gain is the amount, if any, by which the FMV of the assets of the RIC at the beginning
of its first RIC year (or
as of the date the assets were acquired, for any asset with a basis determined by reference to its basis (or the basis of
any other property) in the
hands of a C corporation) exceeds the aggregate adjusted basis of such assets at that time.
Enter on line c the net unrealized built-in gain reduced by the net recognized built-in gain for prior years. See
sections 1374(c)(2) and (d)(1).
Line d.
If the amount on line b exceeds the amount on line a, the excess is treated as a recognized built-in gain in the succeeding
tax year.
Line e.
Enter the section 1374(b)(2) deduction. Generally, this is any net operating loss or capital loss carryforward (to
the extent of net capital gain
included in recognized built-in gain for the tax year) arising in tax years for which the RIC was a C corporation. A capital
loss carryforward must be
used to reduce recognized built-in gain for the tax year to the greatest extent possible before it can be used to reduce the
investment company
taxable income.
Line h.
Credit carryforwards arising in tax years for which the RIC was a C corporation must be used to reduce the tax on
net built-in gain for the tax
year to the greatest extent possible before the credit carryforwards can be used to reduce the tax on the investment company
taxable income.
Line i.
The RIC's tax on the net recognized built-in gain is treated as a loss sustained by the RIC after October 31 of the
same tax year. Deduct the tax
attributable to:
-
Ordinary gain as a deduction for taxes on Form 1120-RIC, line 12.
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Short-term capital gain as a short-term capital loss on Schedule D (Form 1120), line 1.
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Long-term capital gain as a long-term capital loss on Schedule D (Form 1120), line 6.
Include any deferred tax on the termination of a section 1294 election applicable to shareholders in a qualified electing
fund in the amount
entered on line 7. See Form 8621, Part V, and “How to report,” below.
Subtract from the total for line 7 the deferred taxes on the RIC's share of the undistributed earnings of a qualified electing
fund (see Form 8621,
Part II).
How to report.
Attach a schedule showing the computation of each item included in, or subtracted from, the total for line 7. On the
dotted line next to line 7,
enter the amount of tax or interest, identify it as tax or interest, and specify the code section that applies.
Built-in Gains Tax Worksheet(keep for your records)
a.
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Excess of recognized built-in gains over recognized built-in losses
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a.
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b.
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Taxable income
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b.
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c.
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Enter the net unrealized built-in gain reduced by any net recognized built-in gain for all prior years
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c.
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d.
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Net recognized built-in gain (enter the smallest of lines a, b, or c)
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d.
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e.
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Section 1374(b)(2) deduction
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e.
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f.
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Subtract line e from line d. If zero, enter -0- here and on line i
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f.
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g.
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Enter 35% of line f
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g.
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h.
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Business credit and minimum tax credit carryforwards under section 1374(b)(3) from C corporation
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h.
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i.
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Tax. Subtract line h from line g (if zero or less, enter -0-). Enter here and include on line 6 of Schedule J
(see instructions)
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i.
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Schedule K-Other Information
The following instructions apply to questions 1 through 11. Complete all items that apply.
Check the “Yes” box if the RIC is a subsidiary in a parent-subsidiary controlled group. This applies even if the RIC is a subsidiary member
of
one group and the parent corporation of another.
Note.
If the RIC is an “excluded member” of a controlled group (see section 1563(b)(2)), it is still considered a member of a controlled group for
this purpose.
Check the “Yes” box if one foreign person owned at least 25% of (a) the total voting power of all classes of stock of the RIC entitled to
vote
or (b) the total value of all classes of stock of the RIC.
The constructive ownership rules of section 318 apply in determining if a RIC is foreign owned. See section 6038A(c)(5) and
the related
regulations.
Enter on line 5b(1) the percentage owned by the foreign person specified in question 5. For line 5b(2), enter the name of
the owner's country.
Note.
If there is more than one 25%-or-more foreign owner, complete lines 5b(1) and 5b(2) for the foreign person with the highest
percentage of
ownership.
Foreign person.
The term “ foreign person” includes:
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A foreign citizen or nonresident alien.
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An individual who is a citizen of a U.S. possession (but who is not a U.S. citizen or resident).
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A foreign partnership.
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A foreign corporation.
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Any foreign estate or trust within the meaning of section 7701(a)(31).
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A foreign government (or one of its agencies or instrumentalities) to the extent that it is engaged in the conduct of a commercial
activity
as described in section 892.
Owner's country.
For individuals, the term “ owner's country” means the country of residence. For all others, it is the country where incorporated, organized,
created, or administered.
Requirement to file Form 5472.
If the RIC checked “ Yes,” it may have to file Form 5472, Information Return of a 25% Foreign Owned U.S. Corporation or a Foreign Corporation
Engaged In a U.S. Trade or Business. Generally, a 25% foreign-owned corporation that had a reportable transaction with a foreign
or domestic related
party during the tax year must file Form 5472. See Form 5472 for filing instructions.
Tax-exempt interest.
Show any tax-exempt interest received or accrued. Include any exempt-interest dividends received as a shareholder
in a mutual fund or other RIC.
Election under section 853(a).
A RIC may make an irrevocable election under section 853(a) to allow its shareholders to apply their share of the
foreign taxes paid by the RIC
either as a credit or a deduction. If the RIC makes this election, the amount of foreign taxes it paid during the tax year
may not be taken as a
credit or a deduction on Form 1120-RIC, but may be claimed on Form 1120-RIC, Schedule A, line 5, as an addition to the dividends-paid
deduction.
Eligibility.
To qualify to make the election, the RIC must meet the following requirements.
-
More than 50% of the value of the RIC's total assets at the end of the tax year must consist of stock or securities in foreign
corporations.
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The RIC must meet the holding period requirements of section 901(k) with respect to its common and preferred stock. If the
RIC fails to meet
these holding period requirements, the election that allows a RIC to pass through to its shareholders the foreign tax credits
for foreign taxes paid
by the RIC is disallowed. Although the foreign taxes paid may not be taken as a credit by either the RIC or the shareholder,
they are still deductible
at the fund level.
To make a valid election, in addition to timely filing Form 1120-RIC and checking the box for item 10, the RIC must
file:
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Form 1099-DIV and Form 1096, including the statement required by Regulations section 1.853-4; and
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Form 1118, modified to become a statement supporting the RIC's election.
Notification.
If the RIC makes the election, it must furnish to its shareholders a written notice designating the shareholder's
share of foreign taxes paid to
each country or possession and the share of the dividend that represents income derived from sources within each country or
possession. The notice
must be mailed to the shareholders no later than 60 days after the end of the RIC's tax year.
For further information, see Regulations section 1.853-4.
Schedule L-Balance Sheets per Books
The balance sheet should agree with the RIC's books and records.
Line 1. Cash.
Include certificates of deposit as cash on line 1.
Line 4. Tax-Exempt Securities.
Include on this line:
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State and local government obligations, the interest on which is excludible from gross income under section 103(a), and
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Stock in another mutual fund or RIC that distributed exempt-interest dividends during the tax year of the RIC.
Line 24. Adjustments to Shareholders' Equity.
Examples of adjustments to report on this line include:
-
Unrealized gains and losses on securities held “available for sale.”
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Foreign currency translation adjustments.
-
The excess of additional pension liability over unrecognized prior service cost.
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Guarantees of employee stock (ESOP) debt.
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Compensation related to employee stock award plans.
If the total adjustment to be entered on line 24 is a negative amount, enter the amount in parentheses.
Reconciliation of Income (Loss) per Books With Income per Return
Line 5d. Travel and Entertainment.
Include on line 5d any of the following:
-
Meals and entertainment not deductible under section 274(n).
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Expenses for the use of an entertainment facility.
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The part of business gifts over $25.
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Expenses of an individual over $2,000, which are allocable to conventions on cruise ships.
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Employee achievement awards over $400.
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The cost of entertainment tickets over face value (also subject to the 50% limit under section 274(n)).
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The cost of skyboxes over the face value of nonluxury box seat tickets.
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The part of luxury water travel not deductible under section 274(m).
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Expenses for travel as a form of education.
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Other nondeductible travel and entertainment expenses.
For more information, see Pub. 542, Corporations.
Line 7. Tax-Exempt Interest.
Include as interest on line 7 any exempt-interest dividends received by the RIC as a shareholder in a mutual fund
or other RIC.
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