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1. Controlled a foreign partnership (i.e.,

calendar year as equal to 40% of the amount

under Rev. Proc. 2002-16. Also see Rev. Proc.

owned more than a 50% direct or indirect

determined under Temporary Regulations

2002-16 for transition rules concerning

interest in the partnership).

section 1.67-2T(j)(1)(i) for that calendar year.

eligibility and effective dates for consents that

2. Owned at least a 10% direct or indirect

are requested to become effective during 2002.

To make this election, attach to Form

interest in a foreign partnership while U.S.

1120-RIC for the tax year that includes the last

Assembling the Return

persons controlled that partnership.

day of the calendar year for which the fund

3. Had an acquisition, disposition, or

makes the election, a statement that it is

To ensure that the fund’s tax return is correctly

change in proportional interest in a foreign

making an election under Temporary

processed, attach all schedules and other

partnership that:

Regulations section 1.67-2T(j)(2). Once made,

•

forms after page 4, Form 1120-RIC, and in the

Increased its direct interest to at least

the election remains in effect for all subsequent

following order.

10% or reduced its direct interest of at least

calendar years and may not be revoked

1. Schedule N (Form 1120).

10% to less than 10%.

without IRS consent. See Temporary

•

2. Form 4136 and Form 4626.

Changed its direct interest by at least a

Regulations section 1.67-2T for definitions and

3. Additional schedules in alphabetical

10% interest.

other details.

order.

4. Contributed property to a foreign

4. Additional forms in numerical order.

Notice to shareholders. A fund must notify its

partnership in exchange for a partnership

shareholders within 60 days after the close of

interest if:

Complete every applicable entry space on

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its tax year of the distribution made during the

Immediately after the contribution, the

Form 1120-RIC. Do not write “See attached”

tax year that qualifies for the dividends

fund owned, directly or indirectly, at least a

instead of completing the entry spaces. If more

received deduction under section 243. For

10% interest in the foreign partnership; or

space is needed on the forms or schedules,

•

purposes of the dividends-received deduction,

The FMV of the property the fund

attach separate sheets, using the same size

a capital gain dividend received from a RIC is

contributed to the foreign partnership in

and format as the printed forms. If there are

not treated as a dividend.

exchange for a partnership interest, when

supporting statements and attachments,

added to other contributions of property made

Consent to partnership election to close its

arrange them in the same order as the

to the foreign partnership during the preceding

books monthly. Certain money market funds

schedules or forms they support and attach

12-month period, exceeds $100,000.

that obtain an interest in an eligible partnership

them last. Show the totals on the printed forms.

Also, the fund may have to file Form 8865

that invests in assets exempt from taxation

Also, be sure to enter the fund’s name and EIN

to report certain dispositions by a foreign

under section 103 may be qualified to pay

on each supporting statement or attachment.

partnership of property it previously contributed

exempt-interest dividends to its shareholders.

to that foreign partnership if it was a partner at

To qualify for payment of exempt-interest

Accounting Methods

the time of the disposition. For more details,

dividends, a fund must meet the quarterly net

An accounting method is a set of rules used to

including penalties for failing to file Form 8865,

asset value requirements under section

determine when and how income and

see Form 8865 and its separate instructions.

852(b)(5). To maintain the required net asset

expenses are reported. Figure taxable income

value at the end of each quarter, the fund may

Form 8886, Reportable Transaction

using the method of accounting regularly used

take into account on a monthly basis its

Disclosure Statement. Use this form to disclose

in keeping the fund’s books and records.

distributive share of partnership items if the

Generally, permissible methods include cash,

information for each reportable transaction in

eligible partnership makes a proper election to

which the RIC participated. Form 8886 must be

accrual, or any other method authorized by the

close its books at the end of each month. See

filed for each tax year that the RIC enters into a

Internal Revenue Service.

Rev. Proc. 2002-16, 2002-9 IRB 572 for

reportable transaction. The following are

In all cases, the method used must clearly

details.

reportable transactions: (a) any transaction the

show taxable income. If inventories are

Eligibility. A fund is entitled to take into

same as or substantially similar to tax

required, the accrual method must be used for

account its distributive share of partnership

avoidance transactions identified by the IRS,

sales and purchases of merchandise.

items on a monthly basis if:

(b) any transaction offered under conditions of

•

Accrual method. Generally, a fund must use

The fund is entitled to hold itself out as a

confidentiality, (c) any transaction for which the

the accrual method of accounting if its average

money market fund, or an equivalent of a

RIC has contractual protection against

annual gross receipts exceed $5 million. See

money market fund.

disallowance of the tax benefits, and (d) any

•

section 448(c).

The fund provides a statement to the

transaction resulting in a tax credit of more

partnership that it consents to the partnership’s

than $250,000, if the RIC held the asset

Under the accrual method, an amount is

election to close its books monthly and that the

generating the credit for 45 days or less.

includible in income when:

fund will include in its taxable income its

•

All the events have occurred that fix the right

Statements

distributive share of partnership items in a

to receive the income, which is the earliest of

manner consistent with the election. See Rev.

Stock ownership in foreign corporations.

the date (a) the required performance takes

Proc. 2002-16 for the required contents of the

Attach the statement required by section

place, (b) payment is due, or (c) payment is

statement of consent.

551(c) if:

•

received and

•

The fund provides the statement of consent

•

The fund owned 5% or more in value of the

The amount can be determined with

to the custodian or manager of the partnership

outstanding stock of a foreign personal holding

reasonable accuracy.

by the last day of the second month after the

company and

See Regulations section 1.451-1(a) for

•

month in which the fund acquires the

The fund was required to include in its gross

details.

partnership interest.

income any undistributed foreign personal

•

The partnership is eligible under Rev. Proc.

Generally, an accrual basis taxpayer can

holding company income from a foreign

2002-16 to make the monthly closing election

deduct accrued expenses in the tax year when:

personal holding company.

•

and the election is effective by the second

All events that determine the liability have

Transfers to a corporation controlled by the

month after the month in which the fund

occurred,

•

transferor. If the fund receives stock of a

acquires the partnership interest.

The amount of the liability can be figured

corporation in exchange for property, and no

with reasonable accuracy, and

Statement of consent. The consent to a

•

gain or loss is recognized under section 351,

Economic performance takes place with

partnership’s monthly closing election is

the fund (transferor) and the transferee must

respect to the expense.

effective for the month in which the fund

each attach to their tax returns the information

There are exceptions to the economic

acquires the partnership interest, unless the

required by Regulations section 1.351-3.

performance rule for certain items, including

fund requests that the consent be effective for

recurring expenses. See section 461(h) and

Safe harbor under Temporary Regulations

either of the two immediately following

section 1.67-2T(j)(2). Generally, shareholders

the related regulations for determining when

calendar months. In addition to timely providing

in a nonpublicly offered fund that are

economic performance takes place.

the partnership with the statement of consent,

individuals or pass-through entities are treated

the statement should be filed with the fund’s

Mark-to-market accounting method.

as having received a dividend in an amount

Form 1120-RIC for the first tax year in which

Generally, dealers in securities must use the

equal to the shareholder’s allocable share of

the consent is effective. The monthly closing

mark-to-market accounting method described

affected RIC expenses for the calendar year.

consent (and the partnership’s election) may

in section 475. Under this method, any security

They are also treated as having paid or

be revoked only with the consent of the

that is inventory to the dealer must be included

incurred an expense described in section 212

Commissioner. However, the fund’s consent

in inventory at its fair market value (FMV). Any

(and subject to the 2% limitation on

becomes ineffective on any day when the fund

security held by a dealer that is not inventory

miscellaneous itemized deductions) in the

ceases to be an eligible partner and the

and that is held at the close of the tax year is

same amount for the calendar year.

partnership’s monthly closing election is

treated as sold at its FMV on the last business

Election. A nonpublicly offered fund may

terminated as of the first day of any month the

day of the tax year. Any gain or loss must be

elect to treat its affected RIC expenses for a

partnership is no longer eligible for the election

taken into account in determining gross

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Instructions For Form 1120-Ric - U.s. Income Tax Return For Regulated Investment Companies - 2003 Page 4

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