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credits must first be used to reduce the

entitled to vote or (b) the total value of all

Note. In the case of a qualified “fund of

tax on net built-in gain for the tax year to

classes of stock of the RIC.

funds” structure, a RIC may elect to allow

the greatest extent possible. Any

shareholders the foreign tax credit without

The constructive ownership rules of

remaining unused research and minimum

regard to the requirement that more than

section 318 apply in determining if a RIC

tax credits are included on line 28h to

50% of the value of its assets consist of

is foreign owned. See section 6038A(c)(5)

reduce the RIC’s income tax. For more

stock or securities in foreign corporations.

and the related regulations.

information, see the instructions for line

See section 852(g) for more information.

•

Enter on line 5b(1) the percentage

28h.

The RIC must meet the holding period

owned by the foreign person specified in

requirements of section 901(k) with

Line i. The RIC’s tax on the net

question 5. For line 5b(2), enter the name

respect to its common and preferred

recognized built-in gain is treated as a

of the owner’s country.

stock. If the RIC fails to meet these

loss sustained by the RIC after October

holding period requirements, the election

31 of the same tax year. Deduct the tax

Note. If there is more than one

that allows a RIC to pass through to its

attributable to:

25%-or-more foreign owner, complete

•

shareholders the foreign tax credits for

Ordinary gain as a deduction for taxes

lines 5b(1) and 5b(2) for the foreign

foreign taxes paid by the RIC is

on Form 1120-RIC, line 12.

person with the highest percentage of

•

disallowed. Although the foreign taxes

Short-term capital gain as a short-term

ownership.

paid may not be taken as a credit by

capital loss on Schedule D (Form 1120),

Foreign person. The term “foreign

either the RIC or the shareholder, they

line 1.

person” includes:

•

are still deductible at the fund level.

Long-term capital gain as a long-term

•

A foreign citizen or nonresident alien.

capital loss on Schedule D (Form 1120),

•

Reporting requirements. To make a

An individual who is a citizen of a U.S.

line 6.

valid election under section 853, in

possession (but who is not a U.S. citizen

addition to timely filing Form 1120-RIC

How to Report

or resident).

•

and checking the box for Schedule K,

A foreign partnership.

If the RIC checked the “Other” box, enter

•

item 10, the RIC must file a statement of

A foreign corporation.

the tax or interest on line 6, Schedule J.

•

election, which includes the information

Any foreign estate or trust within the

Also, attach a schedule, showing the

listed under Regulations section

meaning of section 7701(a)(31).

computation of each item included in the

•

1.853-4(c). The information must be

A foreign government (or one of its

total for line 6, and identify (a) the type of

provided on or with a Form 1118, Foreign

agencies or instrumentalities) to the

tax or interest, and (b) the applicable

Tax Credit, attached to the RIC’s timely

extent that it is engaged in the conduct of

Code section.

filed tax return.

a commercial activity as described in

Line 7–Total Tax

section 892.

For more information, see Regulations

Include any deferred tax on the

Owner’s country. For individuals, the

section 1.853-4.

termination of a section 1294 election

term “owner’s country” means the country

Notification to shareholders. If the

applicable to shareholders in a qualified

of residence. For all others, it is the

RIC makes the election, it must furnish to

electing fund in the amount entered on

country where incorporated, organized,

its shareholders a written notice

line 7. See Form 8621, Part V, line 7, and

created, or administered.

designating the shareholder’s portion of

How to report, below.

Requirement to file Form 5472. If the

(1) foreign taxes paid by the RIC to

Subtract from the total for line 7 the

RIC checked “Yes,” it may have to file

foreign countries and possessions of the

deferred tax on the RIC’s share of the

Form 5472, Information Return of a 25%

United States, and (2) the dividend that

undistributed earnings of a qualified

Foreign Owned U.S. Corporation or a

represents income derived from:

electing fund (see Form 8621, Part II, line

Foreign Corporation Engaged In a U.S.

•

sources within countries described in

4c).

Trade or Business. Generally, a 25%

section 901(j), and

foreign-owned corporation that had a

•

How to report

other foreign-source income.

reportable transaction with a foreign or

Attach a schedule showing the

domestic related party during the tax year

The notice must be mailed to the

computation of each item included in, or

must file Form 5472. See Form 5472 for

shareholders no later than 60 days after

subtracted from, the total for line 7. On

filing instructions.

the end of the RIC’s tax year. For more

the dotted line next to line 7, enter the

information, see Regulations section

Item 8

amount of tax or interest, identify it as tax

1.853-3.

or interest, and specify the Code section

Tax-exempt interest. Show any

that applies.

Item 11

tax-exempt interest received or accrued.

Include any exempt-interest dividends

Election under section 853A. A RIC

received as a shareholder in a mutual

Schedule K–Other

can elect to pass through credits from tax

fund or other RIC.

credit bonds to its shareholders. If the

Information

RIC makes the election, include the

Item 10

The following instructions apply to

interest income from the tax credit bonds

Election under section 853(a). A RIC

on Part I, line 2. Also, increase the

questions 1 through 11. Complete all

may make an irrevocable election under

items that apply.

dividends paid deduction by the amount

section 853(a) to allow its shareholders to

of the credits distributed to shareholders.

Question 3

apply their share of the foreign taxes paid

If the RIC makes the election, it is not

by the RIC either as a credit or a

Check the “Yes” box if the RIC is a

allowed to take any credits related to the

deduction. If the RIC makes this election,

subsidiary in a parent-subsidiary

qualified tax credit bonds.

controlled group. This applies even if the

the amount of foreign taxes it paid during

For more information, see section

the tax year may not be taken as a credit

RIC is a subsidiary member of one group

853A.

and the parent corporation of another.

or a deduction on Form 1120-RIC, but

may be claimed on Form 1120-RIC,

Note. If the RIC is an “excluded

Notification to shareholders. If the

Schedule A, line 5, as an addition to the

member” of a controlled group (see

RIC makes the election to apply section

dividends-paid deduction.

section 1563(b)(2)), it is still considered a

853A, it must furnish to its shareholders a

member of a controlled group for this

Eligibility. To qualify to make the

written notice designating the

purpose.

election, the RIC must meet the following

shareholder’s proportionate share of: (1)

requirements.

credits from tax credit bonds, and (2)

Question 5

•

More than 50% of the value of the

gross income in respect of such credits.

Check the “Yes” box if one foreign person

RIC’s total assets at the end of the tax

The notice must be mailed to the

owned at least 25% of (a) the total voting

year must consist of stock or securities in

shareholders no later than 60 days after

power of all classes of stock of the RIC

foreign corporations.

the end of the RIC’s tax year.

-13-

Instructions For Form 1120-Ric - U.s. Income Tax Return For Regulated Investment Companies - Internal Revenue Service - 2011 Page 13

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