Form 1120-Ric - Instructions Income Tax - 2001 (Page 4 of 12) in pdf

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

its tax year of the distribution made during the

security held by a dealer that is not inventory

owned more than a 50% direct or indirect

tax year that qualifies for the dividends

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

interest in the partnership).

received deduction under section 243. For

treated as sold at its FMV on the last business

2. Owned at least a 10% direct or indirect

purposes of the dividends-received deduction,

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

interest in a foreign partnership while U.S.

a capital gain dividend received from a RIC is

taken into account in determining gross

persons controlled that partnership.

not treated as a dividend.

income. The gain or loss taken into account is

3. Had an acquisition, disposition, or

generally treated as ordinary gain or loss.

Assembling the Return

change in proportional interest in a foreign

For details, including exceptions, see

partnership that:

section 475, the related regulations, and Rev.

To ensure that the fund’s tax return is correctly

•

Increased its direct interest to at least

Rul. 94-7, 1994-1 C.B. 151.

processed, attach all schedules and other

10% or reduced its direct interest of at least

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

Dealers in commodities and traders in

10% to less than 10%.

following order.

•

securities and commodities may elect to use

Changed its direct interest by at least a

the mark-to-market accounting method. To

1. Schedule N (Form 1120).

10% interest.

make the election, the fund must file a

2. Form 4136 and Form 4626.

4. Contributed property to a foreign

statement describing the election, the first tax

3. Additional schedules in alphabetical

partnership in exchange for a partnership

year the election is to be effective, and in the

order.

interest if:

•

case of an election for traders in securities or

4. Additional forms in numerical order.

Immediately after the contribution, the

commodities, the trade or business for which

fund owned, directly or indirectly, at least a

Complete every applicable entry space on

the election is made. Except for new taxpayers,

10% interest in the foreign partnership; or

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

•

the statement must be filed by the due date

The FMV of the property the fund

instead of completing the entry spaces. If more

(not including extensions) of the income tax

contributed to the foreign partnership in

space is needed on the forms or schedules,

return for the tax year immediately preceding

exchange for a partnership interest, when

attach separate sheets, using the same size

the election year and attached to that return, or

added to other contributions of property made

and format as the printed forms. If there are

if applicable, to a request for an extension of

to the foreign partnership during the preceding

supporting statements and attachments,

time to file that return. For more details, see

12-month period, exceeds $100,000.

arrange them in the same order as the

Rev. Proc. 99-17, 1999-1 C.B. 503, and

Also, the fund may have to file Form 8865

schedules or forms they support and attach

sections 475(e) and (f).

to report certain dispositions by a foreign

them last. Show the totals on the printed forms.

Change in accounting method. Generally,

partnership of property it previously contributed

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

the fund must get IRS consent to change the

to that foreign partnership if it was a partner at

on each supporting statement or attachment.

method of accounting used to report taxable

the time of the disposition. For more details,

income (for income as a whole or for any

including penalties for failing to file Form 8865,

Accounting Methods

material item). To do so, it must file Form

see Form 8865 and its separate instructions.

An accounting method is a set of rules used to

3115, Application for Change in Accounting

determine when and how income and

Method. For more information, see Pub. 538,

Statements

expenses are reported.

Accounting Periods and Methods.

Stock ownership in foreign corporations.

The fund may also have to make an

Figure taxable income using the method of

Attach the statement required by section

adjustment to prevent amounts of income or

accounting regularly used in keeping the fund’s

551(c) if:

books and records. Generally, permissible

expense from being duplicated or omitted. This

•

The fund owned 5% or more in value of the

is called a section 481(a) adjustment, which is

methods include:

outstanding stock of a foreign personal holding

•

taken into account over a period not to exceed

Cash,

company and

•

4 years.

•

Accrual, or

The fund was required to include in its gross

•

Example. A fund changes to the cash

Any other method authorized by the Internal

income any undistributed foreign personal

method of accounting. It accrued sales in 2000

Revenue Code.

holding company income from a foreign

for which it received payments in 2001. It must

In all cases, the method used must clearly

personal holding company.

report those sales in both years as a result of

show taxable income. If inventories are

Transfers to a corporation controlled by the

changing its accounting method and must

required, the accrual method must be used for

transferor. If the fund receives stock of a

make a section 481(a) adjustment to prevent

sales and purchases of merchandise.

corporation in exchange for property, and no

duplication of income.

Generally, a fund must use the accrual

gain or loss is recognized under section 351,

See Rev. Proc. 99-49, 1999-2 C.B. 725, to

method of accounting if its average annual

the fund (transferor) and the transferee must

figure the amount of this adjustment for 2001.

gross receipts exceed $5 million. See section

each attach to their tax returns the information

Include any positive section 481(a) adjustment

448(c).

required by Regulations section 1.351-3.

on Form 1120-RIC, line 7. If the section 481(a)

Under the accrual method, an amount is

Safe harbor under Temporary Regulations

adjustment is negative, report it on Form

includible in income when:

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

1120-RIC, line 22.

•

in a nonpublicly offered fund that are

All the events have occurred that fix the right

individuals or pass-through entities are treated

Accounting Periods

to receive the income which is the earliest of

as having received a dividend in an amount

the date (a) the required performance takes

A fund must figure its taxable income on the

equal to the shareholder’s allocable share of

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

basis of a tax year. The tax year is the annual

affected RIC expenses for the calendar year.

received and

•

accounting period the fund uses to keep its

They are also treated as having paid or

The amount can be determined with

records and report its income and expenses.

incurred an expense described in section 212

reasonable accuracy.

Funds can use a calendar year or a fiscal year.

(and subject to the 2% limitation on

See Regulations section 1.451-1(a) for

For more information about accounting

miscellaneous itemized deductions) in the

details.

periods, see Temporary Regulations section

same amount for the calendar year.

Generally, an accrual basis taxpayer can

1.441-1T, 1.441-2T, and Pub. 538.

Election. A nonpublicly offered fund may

deduct accrued expenses in the tax year when:

•

Calendar year. If the calendar year is adopted

elect to treat its affected RIC expenses for a

All events that determine the liability have

as the annual accounting period, the fund must

calendar year as equal to 40% of the amount

occurred,

•

maintain its books and records and report its

determined under Temporary Regulations

The amount of the liability can be figured

income and expenses for the period from

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

with reasonable accuracy, and

•

January 1 through December 31 of each year.

To make this election, attach to Form

Economic performance takes place with

Fiscal year. A fiscal year is 12 consecutive

respect to the expense.

1120-RIC for the tax year that includes the last

months ending on the last day of any month

There are exceptions to the economic

day of the calendar year for which the fund

except December. A 52 – 53 week year is a

makes the election, a statement that it is

performance rule for certain items, including

fiscal year that varies from 52 to 53 weeks.

recurring expenses. See section 461(h) and

making an election under Temporary

the related regulations for determining when

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

Adoption of tax year. A fund adopts a tax

the election remains in effect for all subsequent

economic performance takes place.

year when it files its first income tax return. It

calendar years and may not be revoked

must adopt a tax year by the due date (not

Mark-to-market accounting method.

without IRS consent. See Temporary

including extensions) of its first income tax

Generally, dealers in securities must use the

Regulations section 1.67-2T for definitions and

return.

mark-to-market accounting method described

other details.

in section 475. Under this method, any security

Change in tax year. Generally, a fund must

Notice to shareholders. A fund must notify its

that is inventory to the dealer must be included

get the consent of the IRS before changing its

shareholders within 60 days after the close of

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

tax year by filing Form 1128, Application To

-4-

Form 1120-Ric - Instructions Income Tax - 2001 Page 4

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