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reportable transaction. The following are

arrange them in the same order as the

Consent to partnership election to

reportable transactions:

schedules or forms they support and attach

close its books monthly

•

Any transaction the same as or substantially

them last. Show the totals on the printed forms.

Certain money market funds that obtain an

similar to tax avoidance transactions identified

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

interest in an eligible partnership that invests in

by the IRS.

on each supporting statement or attachment.

•

assets exempt from taxation under section 103

Any transaction offered under conditions of

Accounting Methods

may be qualified to pay exempt-interest

confidentiality.

•

dividends to its shareholders. To qualify for

Any transaction for which the RIC has

An accounting method is a set of rules used to

payment of exempt-interest dividends, a RIC

contractual protection against disallowance of

determine when and how income and

must meet the quarterly net asset value (NAV)

the tax benefits.

expenses are reported. Figure taxable income

•

requirements under section 852(b)(5). To

Any transaction resulting in a loss of at least

using the method of accounting regularly used

maintain the required NAV at the end of each

$10 million in any single year or $20 million in

in keeping the RIC’s books and records. In all

quarter, the RIC may take into account on a

any combination of years.

cases, the method used must clearly show

•

monthly basis its distributive share of

Any transaction resulting in a book-tax

taxable income.

partnership items if the eligible partnership

difference of more than $10 million on a gross

Generally, permissible methods include:

makes a proper election to close its books at

basis.

•

Cash,

the end of each month. See Rev. Proc.

Any transaction resulting in a tax credit of

•

Accrual, or

2002-16, for details.

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

•

Any other method authorized by the Internal

generating the credit for 45 days or less.

Eligibility. A RIC is entitled to take into

Revenue Code.

account its distributive share of partnership

Statements

items on a monthly basis if:

Accrual method

•

The RIC is entitled to hold itself out as a

Generally, a RIC must use the accrual method

money market fund, or an equivalent of a

Stock ownership in foreign

of accounting if its average annual gross

money market fund.

personal holding companies

•

receipts exceed $5 million. See section 448(c).

The RIC provides a statement to the

(FPHC)

Under the accrual method, an amount is

partnership that it consents to the partnership’s

includible in income when:

election to close its books monthly and that the

Attach the statement required by section

RIC will include in its taxable income its

1. All the events have occurred that fix the

551(c) if:

•

distributive share of partnership items in a

right to receive the income, which is the

The RIC owned 5% or more in value of the

manner consistent with the election. See Rev.

earliest of the date:

outstanding stock of a FPHC and

•

Proc. 2002-16 for the required contents of the

The RIC was required to include in its gross

a. the required performance takes place,

statement of consent.

income any undistributed foreign personal

b. payment is due, or

•

The RIC provides the statement of consent

holding company income from a FPHC.

c. payment is received, and

to the custodian or manager of the partnership

2. The amount can be determined with

Transfers to a corporation

by the last day of the second month after the

reasonable accuracy.

month in which the RIC acquires the

controlled by the transferor

partnership interest.

See Regulations section 1.451-1(a) for

If the RIC receives stock of a corporation in

•

The partnership is eligible under Rev. Proc.

details.

exchange for property, and no gain or loss is

2002-16 to make the monthly closing election

Generally, an accrual basis taxpayer can

recognized under section 351, the RIC

and the election is effective by the second

deduct accrued expenses in the tax year when:

(transferor) and the transferee must each

•

month after the month in which the RIC

All events that determine the liability have

attach to their tax returns the information

acquires the partnership interest.

occurred,

required by Regulations section 1.351-3.

•

Statement of consent. The consent to a

The amount of the liability can be figured

Safe harbor under Temporary

partnership’s monthly closing election is

with reasonable accuracy, and

•

effective for the month in which the RIC

Economic performance takes place with

Regulations section 1.67-2T(j)(2)

acquires the partnership interest, unless the

respect to the expense.

Generally, shareholders in a nonpublicly

RIC requests that the consent be effective for

There are exceptions to the economic

offered fund that are individuals or

either of the two immediately following

performance rule for certain items, including

pass-through entities are treated as having

calendar months. In addition to timely providing

recurring expenses. See section 461(h) and

received a dividend in an amount equal to the

the partnership with the statement of consent,

the related regulations for determining when

shareholder’s allocable share of affected RIC

the statement should be filed with Form

economic performance takes place.

expenses for the calendar year. They are also

1120-RIC for the first tax year in which the

Mark-to-market accounting method

treated as having paid or incurred an expense

consent is effective. The monthly closing

described in section 212 (and subject to the

consent (and the partnership’s election) may

Generally, dealers in securities must use the

2% limitation on miscellaneous itemized

be revoked only with the consent of the

mark-to-market accounting method described

deductions) in the same amount for the

Commissioner. However, the RIC’s consent

in section 475. Under this method, any security

calendar year.

becomes ineffective on any day when the RIC

that is inventory to the dealer must be included

ceases to be an eligible partner and the

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

Election. A nonpublicly offered fund may elect

to treat its affected RIC expenses for a

partnership’s monthly closing election is

security held by a dealer that is not inventory

terminated as of the first day of any month the

calendar year as equal to 40% of the amount

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

partnership is no longer eligible for the election

treated as sold at its FMV on the last business

determined under Temporary Regulations

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

under Rev. Proc. 2002-16. See Rev. Proc.

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

2002-16 for additional rules.

taken into account in determining gross

To make this election, attach to Form

income. The gain or loss taken into account is

1120-RIC for the tax year that includes the last

Assembling the Return

generally treated as ordinary gain or loss.

day of the calendar year for which the fund

For details, including exceptions, see

makes the election, a statement that it is

To ensure that the RIC’s tax return is correctly

section 475, the related regulations, and Rev.

making an election under Temporary

processed, attach all schedules and other

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

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

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

the election remains in effect for all subsequent

following order.

Dealers in commodities and traders in

calendar years and may not be revoked

securities and commodities may elect to use

1. Schedule N (Form 1120).

without IRS consent. See Temporary

the mark-to-market accounting method. To

2. Form 4136.

Regulations section 1.67-2T for definitions and

make the election, the RIC must file a

3. Form 4626.

other details.

statement describing the election, the first tax

4. Additional schedules in alphabetical

year the election is to be effective, and in the

order.

Notice to shareholders

case of an election for traders in securities or

5. Additional forms in numerical order.

A RIC must notify its shareholders within 60

commodities, the trade or business for which

days after the close of its tax year of the

Complete every applicable entry space on

the election is made. Except for new taxpayers,

distribution made during the tax year that

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

the statement must be filed by the due date

qualifies for the dividends received deduction

instead of completing the entry spaces. If more

(not including extensions) of the income tax

under section 243. For purposes of the

space is needed on the forms or schedules,

return for the tax year immediately preceding

dividends-received deduction, a capital gain

attach separate sheets, using the same size

the election year and attached to that return, or

dividend received from a RIC is not treated as

and format as the printed forms. If there are

if applicable, to a request for an extension of

a dividend.

supporting statements and attachments,

time to file that return. For more details, see

-4-

Instructions For Form 1120-Ric - U.s. Income Tax Return For Regulated Investment Companies - 2004 Page 4

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