rp-16-31.pdf

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26 CFR § 601.105: Examination of returns and claims for refund, credit, or abatement;
determination of correct tax liability.
(Also: Part I, § 852)

Rev. Proc. 2016-31

SECTION 1. PURPOSE
This revenue procedure provides temporary relief for certain money market funds
(MMFs) that receive contributions from their advisers as the MMFs transition to comply
with Securities and Exchange Commission (SEC) rules that change how certain MMF
shares are priced. See Money Market Fund Reform; Amendments to Form PF (79 FR
47736) (SEC MMF Reform Rules).
SECTION 2. BACKGROUND
.01 An MMF is a type of investment company registered under the Investment
Company Act of 1940 (1940 Act) and regulated as an MMF under Rule 2a–7 under the
1940 Act (17 CFR 270.2a–7) (Rule 2a–7). (The SEC MMF Reform Rules amended
Rule 2a–7.) MMFs have historically sought to keep stable (typically at $1.00) the prices
at which their shares are distributed, redeemed, and repurchased. The securities that
Rule 2a–7 permits an MMF to hold generally result in no more than minimal fluctuations
in the MMF’s net asset value per share (NAV).

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.02 Before the SEC MMF Reform Rules amended Rule 2a–7, MMFs meeting the
requirements of Rule 2a–7 were generally permitted to value all of their assets at
acquisition cost, with certain adjustments (amortized cost valuation method), and to
price their shares by rounding the resulting NAV to the nearest 1 percent (penny-
rounding pricing). These methods have enabled MMFs to maintain stable share prices
in almost all circumstances.
.03 The SEC MMF Reform Rules bar the use of the amortized cost valuation method
and penny-rounding pricing for certain MMFs and require these MMFs to value their
assets using market factors and to round their price per share to the nearest basis point,
which is the fourth decimal place in the case of a fund with a $1.0000 share price.
MMFs that value their assets in this way and round to this level of accuracy are called
“floating-NAV MMFs.” MMFs that invest 99.5 percent or more of their assets in
government securities or repurchase agreements collateralized fully with government
securities or cash items (government MMFs) or limit all of their beneficial owners to
natural persons (retail MMFs) may continue to use the amortized cost valuation method
and penny-rounding pricing (stable-NAV MMFs). An MMF that is not a government
MMF or a retail MMF must convert to a floating-NAV MMF no later than October 14,
2016. An MMF converting to a floating NAV may receive (from, for example, the MMF’s
adviser) a contribution so that when the MMF transitions to a floating NAV all
shareholders receive the same value per share at the time of the transition (a top up
contribution).
.04 The Treasury Department and the Internal Revenue Service (the “Service”)
issued proposed regulations under sections 446 and 6045 of the Internal Revenue

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Code (Code) in 2014 (79 FR 43694) (the 2014 proposed regulations) providing a
permissible, simplified method of accounting for gains and losses on shares in MMFs
and clarifying reporting requirements for shares in MMFs. The Service received written
comments responding to the 2014 proposed regulations. One commenter stated that it
believes that sponsors of an MMF that will become a floating-NAV MMF may wish to
make contributions to the MMF to raise the MMF’s NAV to $1.0000 before the MMF’s
NAV begins to float. The commenter added that contributions may be made in other
transitional contexts, such as the merger, conversion, or other reorganization of one or
more MMFs, to facilitate compliance with the SEC MMF Reform Rules.
.05 In the preamble to the SEC MMF Reform Rules, the SEC provided exemptive
relief for certain reorganizations and involuntary redemptions undertaken in connection
with beginning to comply with the amendments to Rule 2a–7. Provided certain
conditions are met, MMFs may therefore carry out these reorganizations and
redemptions without seeking the separate exemptive relief from the SEC that would
ordinarily be required. See 79 FR at 47798–99.
.06 Under the SEC MMF Reform Rules, an MMF must disclose the occurrence of
certain events, including the provision to the fund by the fund’s sponsor (or certain other
persons) of “any form of financial support to the fund (including any (i) capital
contribution, ...).” 17 CFR 274.222. Specifically, if an MMF receives financial support
from its sponsor, it must timely report this support on Form N-CR, “Current Report:
Money Market Fund Material Events,” and must disclose the support prominently on its
website. See 17 CFR 270.30b1–8; 17 CFR 270.2a–7(h)(10)(v).

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.07 The staff of the SEC Division of Investment Management has stated that it will
not object if certain transactions that provide financial support are not reported on Form
N-CR. In particular, if a top up contribution occurs as part of a transition for money
market funds to implement the floating NAV reform before the October 14, 2016,
compliance deadline, the staff has stated that it would not object if the transaction is not
reported on Form N-CR, because such transactions are primarily intended to bring a
fund into compliance with revised money market fund regulations in a way that avoids
unfair results or dilution.
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.08 An MMF must meet distribution requirements to be taxed as a regulated
investment company (RIC) under part 1 of subchapter M and to avoid the imposition of
an excise tax under section 4982 of the Code. Section 852(b)(1) imposes a tax,
computed under section 11, on a RIC’s investment company taxable income (ICTI).
Section 852(b)(2) defines ICTI as taxable income with several adjustments, including
the exclusion of net capital gain and the allowance of a deduction for dividends paid.
For an MMF to be taxed as a RIC, section 852(a)(1) requires the MMF’s deduction for
dividends paid (determined without regard to capital gain dividends) to equal or exceed
the sum of 90 percent of the RIC’s ICTI for the taxable year (determined without regard
to the deduction for dividends paid) and 90 percent of the excess of the RIC’s interest
income excludable from gross income under section 103(a) over the RIC’s deductions
disallowed under sections 265 and 171(a)(2).

1
Top up contributions are discussed in a website posting entitled, “2014 Money Market Fund Reform
Frequently Asked Questions.” See 2014 Money Market Fund Reform Frequently Asked Questions
(March 18, 2016, revision) http://www.sec.gov/divisions/investment/guidance/2014-money-market-fund-
reform-frequently-asked-questions.shtml.

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.09 Section 4982(a) imposes an excise tax on a RIC for each calendar year equal to
4 percent of the excess of the required distribution for the calendar year over the
distributed amount for the calendar year. Under section 4982(b), a RIC’s required
distribution for a calendar year generally is the sum of 98 percent of the RIC’s ordinary
income for the calendar year, plus 98.2 percent of the RIC’s capital gain net income for
the 1-year period ending on October 31 of the calendar year.
2
Under section 4982(c),
the distributed amount for a calendar year generally is the sum of the RIC’s deductions
for dividends paid during the calendar year and any amount on which tax is imposed
under section 852(b)(1) or (b)(3)(A) for a taxable year ending in the calendar year.
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Under section 4982(c)(4), if a RIC has an amount taxed under section 852(b)(1) or
(b)(3)(A) for a taxable year and the RIC makes estimated tax payments on that amount
during the calendar year in which the taxable year begins, the RIC may elect to include
that amount in the RIC’s distributed amount for that calendar year (instead of the
calendar year in which the taxable year ends).
.10 If the distribution requirements in sections 852 and 4982 apply to an adviser
contribution, it may be impossible or impractical for the advisers of some MMFs to make
contributions that raise the MMFs’ NAVs to $1.0000, so that shareholders will receive
the same value per share both before and after the transition to a floating NAV. If
contributions from an adviser are subject to the distribution requirements, then, to
increase the value of an MMF’s portfolio by a given amount, an adviser may need to

2
Section 4982(b) also contains rules for increasing the required distribution for a calendar year that
follows a calendar year in which there is a shortfall. Section 4982(e) defines the terms “ordinary income”
and “capital gain net income” for purposes of section 4982 and provides additional rules.
3
Section 4982(c) also contains rules for determining the dividends paid during a calendar year and for
adjusting the distributed amount for a calendar year that follows a calendar year in which there is an
overdistribution.

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contribute more than ten times that amount to “gross up” the contribution for both a
90-percent distribution requirement and tax on the undistributed amount. Comments
submitted in response to the 2014 proposed regulations recommended guidance that
would facilitate contributions to raise the MMF’s NAV to $1.0000. Specifically, a
commenter recommended that if a sponsor makes contributions to an MMF before
October 14, 2016, the contributions would neither result in income or gain to the MMF
nor reduce the basis of the MMF’s assets.
.11 The Treasury Department and the Service believe that it is in the interest of
sound tax administration to apply section 852 in a manner that will support the efforts of
the staff of the SEC Division of Investment Management to facilitate a smooth transition
to compliance with SEC MMF Reform Rules. The Treasury Department and the
Service believe that excluding certain adviser contributions from ICTI for purposes of
the distribution requirements in section 852(a) is important to facilitate those
contributions but do not believe the contributions should be excluded from the RIC’s
income for other federal tax purposes.
SECTION 3. SCOPE
This revenue procedure applies to a top up contribution that is received by an MMF
as part of a transition to implement the floating NAV reform before the October 14,
2016, compliance deadline, as described in Section 2.07 above.
SECTION 4. APPLICATION
If an MMF receives a contribution that is described in section 3 of this revenue
procedure, the Service will not challenge the MMF’s treatment of the contribution as an
amount that is included in ICTI for purposes of section 852(b)(2) but is excluded from

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ICTI for purposes of section 852(a)(1). The treatment described in this section 4 applies
only to contributions described in section 3 of this revenue procedure.
SECTION 5. EXAMPLE
The following example illustrates the operation of this revenue procedure.
(i) Fund is an MMF that uses a March 31 taxable year for federal income tax
purposes. Fund has a stable NAV but is required under SEC MMF Reform Rules to
become a floating-NAV MMF before October 14, 2016. As of April 22, 2016, Fund has
500 million outstanding shares and assets with a fair market value of $498,000,000.
Fund’s published NAV on April 22, 2016, is $1.00, but Fund’s NAV determined using
market factors and rounded to the nearest basis point is $0.9960. On April 25, 2016,
Fund’s investment adviser makes a $3,000,000 contribution to Fund that is described in
section 3 of this revenue procedure. During its taxable year ending on March 31, 2017,
Fund has $2,000,000 in ordinary income from securities in its portfolio and distributes
$2,000,000 in ordinary dividends to its shareholders. Fund has no capital gains or
losses and pays no capital gain dividends. Fund elects the application of
section 4982(c)(4) for the 2016 calendar year. Consistent with that election, Fund
makes an estimated tax payment of $1,020,000 during the 2016 calendar year with
respect to Fund’s taxable year ending on March 31, 2017. This amount reflects the tax
under section 852(b)(1) on $3,000,000 of Fund’s ICTI for that taxable year.
(ii) For its taxable year ending on March 31, 2017, Fund has ordinary income of
$5,000,000. For purposes of section 852(b)(2), Fund’s ICTI for that year is $3,000,000,
because Fund has a $2,000,000 deduction for dividends paid. The tax on $3,000,000,

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computed under section 11, is $1,020,000, which was timely satisfied by the estimated
tax payments that Fund made during 2016.
(iii) For purposes of section 852(a)(1), Fund treated its ICTI as being $2,000,000
(excluding the adviser contribution and disregarding the deduction for dividends paid).
Because Fund distributed $2,000,000 of dividends in that taxable year, it distributed
over 90 percent of the amount that it is treating for purposes of section 852(a) as its
ICTI. Consistent with section 4 of this revenue procedure, the Service will not assert
that Fund failed to satisfy the distribution requirement in section 852(a)(1).
(iv) Under section 4982(c)(4)(A)(i), Fund’s distributed amount for 2016 is increased
by the $3,000,000 with respect to which Fund made a $1,020,000 estimated tax
payment. Thus, section 4982 does not impose an excise tax on Fund for 2016. Under
section 4982(c)(4)(A)(ii), Fund’s distributed amount for 2017 will be decreased by
$3,000,000 to avoid double-counting.
(v) After payment of $1,020,000 of income taxes, the contribution of $3,000,000
increased the value of Fund’s portfolio to $499,980,000. After this increase, Fund’s
NAV, rounded to the nearest basis point, is $1.0000.
SECTION 6. EFFECTIVE DATE
This revenue procedure is effective for contributions that are described in section 3
of this revenue procedure. Section 3 of this revenue procedure does not describe any
contribution made after certain MMFs are required to become floating-NAV MMFs.
SECTION 7. DRAFTING INFORMATION
The principal author of this revenue procedure is Grace Cho of the Office of
Associate Chief Counsel (Financial Institutions & Products). For further information

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regarding this revenue procedure contact Ms. Cho at (202) 317-6945 (not a toll-free
call).