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section 401(k) cash or deferred

Do not include salaries and wages

See section 164(d) for

arrangement, or amounts contributed

deductible elsewhere on the return,

apportionment of taxes on real property

under a salary reduction SEP

such as elective contributions to a

between seller and purchaser.

agreement or a SIMPLE IRA plan.

section 401(k) cash or deferred

Line 13. Interest

arrangement, or amounts contributed

Include only the deductible part of

Interest expense cannot be

under a salary reduction SEP

officers’ compensation on Schedule E.

used to offset interest income.

agreement or a SIMPLE IRA plan.

Complete Schedule E, columns (a)

CAUTION

through (e), for all officers. The RIC

If the RIC provided taxable

Interest allocation. The RIC must

determines who is an officer under the

fringe benefits to its employees,

make an interest allocation if the

laws of the state where incorporated.

such as personal use of a car,

CAUTION

proceeds of a loan were used for more

do not deduct as wages any amounts

Disallowance of deduction for

than one purpose (for example, to

deducted elsewhere.

employee compensation in excess of

purchase a portfolio investment and to

Line 11. Rents. If the RIC rented or

$1 million. Publicly held corporations

acquire an interest in a passive

leased a vehicle, enter the total annual

may not deduct compensation to a

activity). See Temporary Regulations

rent or lease expense paid or incurred

“covered employee” to the extent that

section 1.163-8T for the interest

during the year. Also, complete Part V

the compensation exceeds $1 million.

allocation rules.

of Form 4562, Depreciation and

Generally, a covered employee is:

•

Amortization. If the RIC leased a

The following interest is not

The chief executive officer (or an

vehicle for a term of 30 days or more,

deductible:

individual acting in that capacity) as of

•

the deduction for the vehicle lease

Interest on indebtedness incurred or

the end of the tax year; or

•

continued to purchase or carry

expense may have to be reduced by an

An employee whose total

obligations if the interest is wholly

amount called the inclusion amount.

compensation must be reported to

exempt from income tax. For

shareholders under the Securities

The RIC may have an inclusion

exceptions, see section 265(b).

Exchange Act of 1934 because the

amount if:

•

For cash basis taxpayers, prepaid

employee is among the four highest

interest allocable to years following the

compensated officers for that tax year

And the

current tax year.

(other than the chief executive officer).

vehicle’s

•

Interest and carrying charges on

FMV on

For this purpose, compensation

straddles. Generally, these amounts

the first

does not include:

must be capitalized. See section

day of the

•

Income from certain employee trusts,

263(g).

lease

annuity plans, or pensions.

The lease term began:

exceeded:

•

Special rules apply to:

Any benefit paid to an employee that

•

Interest on which no tax is imposed

After 12/31/04 but before 1/1/07

$15,200

is excluded from the employee’s

(see section 163(j)).

income.

•

After 12/31/03 but before 1/1/05

$17,500

Original issue discount on certain

If the lease term began before January 1, 2002,

The deduction limit does not apply

high-yield discount obligations (see

see Pub. 463, Travel, Entertainment, Gift, and Car

to:

section 163(e)(5)(C) to figure the

•

Expenses, to find out if the RIC has an inclusion

Commissions based on individual

disqualified portion).

amount. The inclusion amount for lease terms

•

performance;

The deduction for interest when the

beginning in 2007 will be published in the Internal

•

Qualified performance-based

. . . . . . . . . . .

RIC is a policyholder or beneficiary with

Revenue Bulletin in early 2007.

compensation; and

respect to a life insurance, endowment,

•

Income payable under a written,

or annuity contract issued after June 8,

See Pub. 463 for instructions on

binding contract in effect on February

1997. For details, see section 264(f).

figuring the inclusion amount.

17, 1993.

Attach a statement showing the

Line 12. Taxes and Licenses. Enter

computation of the deduction.

The $1 million limit is reduced by

taxes paid or accrued during the tax

amounts disallowed as excess

Line 14. Depreciation. Include on line

year, but do not include the following:

•

parachute payments under section

14 the part of the cost that the RIC

Federal income taxes (except for the

280G.

elected to expense under section 179

tax imposed on net recognized built-in

for certain property placed in service

gain allocable to ordinary income).

For details, see section 162(m) and

•

during tax year 2006 or carried over

Foreign or U.S. possession income

Regulations section 1.162-27.

from 2005. See Form 4562 and its

taxes if a foreign tax credit is claimed,

Line 10. Salaries and Wages. Enter

instructions to figure the amount of

or if the RIC made an election under

the salaries and wages paid for the tax

depreciation to enter on this line.

section 853.

year, reduced by the amount claimed

•

Excise taxes imposed under section

Line 22. Other Deductions

on:

4982 on undistributed RIC income.

•

Line 2, section A and Line 6, Section

•

Penalties or fines paid to any

Taxes not imposed on the RIC.

B of Form 5884-A, Credits for

•

government agency or

Taxes, including state or local sales

Employers Affected by Hurricane

instrumentality because of a

CAUTION

taxes, that are paid or incurred in

Katrina, Rita, or Wilma,

violation of a law are not deductible.

connection with an acquisition or

•

Line 2 of Form 8844, Empowerment

See Chapter 11, Other Expenses, in

disposition of property (these taxes

zone and renewal community

Publication 535 for additional

must be treated as a part of the cost of

employment credit,

information.

the acquired property or, in the case of

•

Line 2 of Form 5884, Work

a disposition, as a reduction in the

Attach a schedule listing by type and

Opportunity Credit;

amount realized on the disposition).

amount all allowable deductions that

•

Line 4 of Form 8845, Indian

•

Taxes assessed against local

are not specifically deductible

Employment Credit; and

benefits that increase the value of the

elsewhere on the return. Generally, a

•

Line 2 of Form 8861,

property assessed (such as for paving,

deduction may not be taken for any

Welfare-to-Work Credit.

etc.).

amount that is allocable to tax-exempt

•

See the instructions for these forms

Taxes deducted elsewhere on the

income. See section 265(b) for

for more information.

return.

exceptions.

-8-

Instructions For Form 1120-Ric - U.s. Income Tax Return For Regulated Investment Companies - 2006 Page 8

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