rr-12-29.pdf

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Section 1212 .- Capital loss carrybacks and carryovers
(Also Section 4982.)

Rev. Rul. 2012-29

# ISSUE

How does the effective date provision of section 101(c) of the Regulated
Investment Company Modernization Act of 2010, Pub. L. 111-325 (2010) ("Act"),
pertaining to the Act's amendments to section 1212(a) of the Internal Revenue Code,
apply for purposes of the excise tax imposed by section 4982?

FACTS

Corporation R is taxed as a regulated investment company ("RIC") under part I of
subchapter M of the Code and uses a taxable year ending on June 30 for income tax
purposes. R recognized long-term capital losses on November 1, 2010, January 3,
2011, and July 1, 2011, but recognized no other capital gains or losses from July 1,
2010, through June 30, 2012.

LAW AND ANALYSIS

Section 4982(a) of the Code imposes "on every regulated investment company
for each calendar year" an excise tax equal to 4 percent of the excess, if any, of (1) the

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required distribution for the calendar year, over (2) the distributed amount for that same
calendar year. Section 4982(b)(1) defines "required distribution" to mean, with respect
to any calendar year, the sum of (A) 98 percent of the RIC's ordinary income for that
calendar year, plus (B) 98.2 percent of the RIC's "capital gain net income for the 1-year
period ending on October 31 of such calendar year." Section 4982(e)(2)(A) defines
"capital gain net income" as having the same meaning given to that term by
section 1222(9), "determined by treating the one-year period ending on October 31 of
any calendar year as the company's taxable year." Section 1222(9) provides that "[t]he
term 'capital gain net income' means the excess of the gains from sales or exchanges
of capital assets over the losses from such sales or exchanges."

Section 101 of the Act amended section 1212(a) to allow RICs to carry forward
net capital losses indefinitely and to preserve the treatment of components of those
losses as long-term or short-term. Section 101(c) of the Act provides that "[t]he
amendments made by [section 101 of the Act] shall apply to net capital losses for
taxable years beginning after the date of the enactment of [the] Act." The date of
enactment was December 22, 2010. Before the Act, RICs could carry net capital losses
forward only for eight years, with any losses carried forward being treated as short-term
capital losses in the year of use. This previous rule continues to apply to net capital
losses recognized by RICs in taxable years beginning on or before December 22, 2010.
Thus, for Federal income tax purposes, R's July 1, 2011, net capital loss carries forward
indefinitely, but R's net capital losses recognized before that date are subject to prior

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law and can only be carried forward for eight years (treated as short-term capital
losses).

Section 101(c) of the Act does not specify how its effective date rule applies for
purposes of the excise tax under section 4982. The section 4982 excise tax is imposed
on the basis of whether sufficient dividends are paid during a calendar year. Thus, for
any RIC, the taxable year for purposes of the excise tax is the calendar year. The
calendar year beginning on January 1, 2011, is the first excise tax period that begins
after the December 22, 2010, date of enactment.

The sufficiency of dividends paid during a calendar year for excise tax purposes
is measured by taking into account both a RIC's ordinary income for that calendar year
and (absent an election under section 4982(e)(4) for a RIC eligible to make such an
election) the RIC's capital gain net income, determined with regard to any carried-
forward capital losses, for the November 1-October 31 period that ends within that
calendar year. Thus, the excise tax distribution requirements for calendar year 2011
(the first excise tax period beginning after the date of enactment of the Act) are
determined based in part on capital gains and losses that are recognized for the period
that runs from November 1, 2010, to October 31, 2011. Accordingly, to the extent that
the capital gains and losses recognized for the November 1, 2010 - October 31, 2011,
period result in a net capital loss, the net capital loss is carried forward indefinitely for
purposes of section 4982. The carryforward is effected in a manner consistent with
section 1212(a), as amended by Section 101 of the Act.

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As applied to R, all three of R's capital losses (including the November 1, 2010,
loss) are taken into account for the first excise tax period that begins after the date of
enactment (calendar year 2011). Accordingly, the net capital loss composed of those
three capital losses is carried forward indefinitely for excise tax purposes.
HOLDING

For purposes of the excise tax imposed by section 4982, the Act's amendments
to the loss carryover rules in section 1212(a) apply beginning with any net capital loss
recognized in the period that determines a RIC's required distribution for calendar year
2011. Accordingly, the amendments apply to net capital losses recognized during the
one year period that (absent an election under section 4982(e)(4)) begins on November
1, 2010.

# DRAFTING INFORMATION

The principal author of this revenue ruling is Andrea M. Hoffenson of the Office of
Associate Chief Counsel (Financial Institutions & Products). For further information
regarding this revenue ruling, contact Andrea M. Hoffenson at (202) 622-2930 (not a
toll-free call).