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Instructions for Form 1120-RIC
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13:09 - 23-JUL-2007
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2007
Department of the Treasury
Internal Revenue Service
Instructions for Form
1120-RIC
U.S. Income Tax Return for Regulated Investment Companies
Section references are to the Internal
Revenue Code unless otherwise noted.
Contents
Page
Photographs of Missing Children . . . . 1
Unresolved Tax Issues . . . . . . . . . . . . 1
How To Get Forms and
Publications . . . . . . . . . . . . . . . . . . 1
General Instructions . . . . . . . . . . . . . 2
Purpose of Form . . . . . . . . . . . . . . . . 2
Who Must File . . . . . . . . . . . . . . . . . . 2
General Requirements to Qualify
as a RIC . . . . . . . . . . . . . . . . . . . . 2
Other Requirements . . . . . . . . . . . . . . 2
Definition of a Fund . . . . . . . . . . . . . . 2
Where To File . . . . . . . . . . . . . . . . . . 2
When To File . . . . . . . . . . . . . . . . . . . 3
Who Must Sign . . . . . . . . . . . . . . . . . 3
Paid Preparer Authorization . . . . . . . . 3
Assembling the Return . . . . . . . . . . . . 3
Depository Methods of Tax
Payment . . . . . . . . . . . . . . . . . . . . 3
Estimated Tax Payments . . . . . . . . . . 4
Interest and Penalties . . . . . . . . . . . . . 4
Accounting Methods . . . . . . . . . . . . . . 4
Accounting Periods . . . . . . . . . . . . . . 5
Rounding Off to Whole Dollars . . . . . . 5
Recordkeeping . . . . . . . . . . . . . . . . . . 5
Other Forms That May Be
Required . . . . . . . . . . . . . . . . . . . . 5
Statements . . . . . . . . . . . . . . . . . . . . 5
Specific Instructions . . . . . . . . . . . . 6
Period Covered . . . . . . . . . . . . . . . . . 6
Name and Address . . . . . . . . . . . . . . 6
Item B. Date RIC Was
Established . . . . . . . . . . . . . . . . . . 6
Item C. Employer Identification
Number (EIN) . . . . . . . . . . . . . . . . . 6
Item D. Total Assets . . . . . . . . . . . . . . 6
Item E. Final Return, Name
Change, Address Change, or
Amended Return . . . . . . . . . . . . . . 6
Part I — Investment Company
Taxable Income . . . . . . . . . . . . . . 6-9
Schedule A . . . . . . . . . . . . . . . . . . . . 9
Schedule B . . . . . . . . . . . . . . . . . . . . 9
Schedule J . . . . . . . . . . . . . . . . . 9 – 11
Schedule K . . . . . . . . . . . . . . . . . . . 11
Schedule L . . . . . . . . . . . . . . . . . . . 12
Schedule M-1 . . . . . . . . . . . . . . . . . 12
What’s New
Photographs of Missing
Children
The Internal Revenue Service is a proud
partner with the National Center for
• Call, write, or fax the Taxpayer
Missing and Exploited Children.
Photographs of missing children selected
by the Center may appear in instructions
on pages that would otherwise be blank.
You can help bring these children home
by looking at the photographs and calling
1-800-THE-LOST (1-800-843-5678) if you
recognize a child.
Advocate office in its area (see Pub. 1546
for addresses and phone numbers).
• TTY/TDD help is available by calling
1-800-829-4059.
• Visit the website at www.irs.gov/
advocate.
Unresolved Tax Issues
How To Get Forms
and Publications
If the Regulated Investment Company
(RIC) has attempted to deal with an IRS
problem unsuccessfully, it should contact
the Taxpayer Advocate. The Taxpayer
Advocate independently represents the
RIC’s interest and concerns within the
IRS by protecting its rights and resolving
problems that have not been fixed
through normal channels.
While Taxpayer Advocates cannot
change the tax law or make a technical
tax decision, they can clear up problems
that resulted from previous contacts and
ensure that the RIC’s case is given a
complete and impartial review.
The RIC’s assigned personal advocate
will listen to its point of view and will work
with the RIC to address its concerns. The
RIC can expect the advocate to provide:
• A “fresh look” at a new or ongoing
problem,
• Timely acknowledgement,
• The name and phone number of the
individual assigned to its case,
• Updates on progress,
• Timeframes for action,
• Speedy resolution, and
• Courteous service.
When contacting the Taxpayer
Advocate, the RIC should be prepared to
provide the following information:
• The RIC’s name, address, and
employer identification number (EIN).
• The name and telephone number of an
authorized contact person and the hours
he or she can be reached.
• The type of tax return and year(s)
involved.
• A detailed description of the problem.
• Previous attempts to solve the problem
and the office that was contacted.
• A description of the hardship the RIC is
facing and supporting documentation (if
applicable).
The RIC can contact a Taxpayer
Advocate as follows.
• Call the Taxpayer Advocate’s toll-free
number: 1-877-777-4778.
Cat. No. 64251J
Internet. You can access the IRS
website 24 hours a day, 7 days a week, at
www.irs.gov to:
• Download forms, instructions, and
publications;
• Order IRS products online;
• Research your tax questions online;
• Search publications online by topic or
keyword; and
• Sign up to receive local and national
tax news by email.
IRS tax products CD. You can order
Publication 1796, IRS Tax Products CD,
and obtain:
• Current year forms, instructions, and
publications;
• Prior year forms, instructions and
publications;
• Bonus: Historical Tax Products DVD –
Ships with the final release;
• Tax Map: an electronic research tool
and finding aid;
• Tax law frequently asked questions
(FAQs);
• Tax topics from the IRS telephone
response system;
• Fill-in, print and save features for most
tax forms;
• Internal Revenue Bulletins; and
• Toll-free and email technical support.
The CD is released twice during the
year. The first release will ship the
beginning of January and the final release
will ship the beginning of March.
Buy the CD from the National
Technical Information Service (NTIS) at
www.irs.gov/cdorders for $35 (no
handling fee) or call 1-877-CDFORMS
(1-877-233-6767) toll-free to buy the
CD-ROM for $35 (plus a $5 handling fee).
Price is subject to change.
By phone and in person. You can
order forms and publications by calling
1-800-TAX-FORM (1-800-829-3676). You
can also get most forms and publications
at your local IRS office.
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Instructions for Form 1120-RIC
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Deleted topic, "How to
Access the I.R.B."
General Instructions
Purpose of Form
Use Form 1120-RIC, U.S. Income Tax
Return for Regulated Investment
Companies, to report the income, gains,
losses, deductions, credits, and to figure
the income tax liability of a regulated
investment company (RIC) as defined in
section 851.
Who Must File
A domestic corporation that meets certain
conditions (discussed below) must file
Form 1120-RIC if it elects to be treated as
a RIC for the tax year (or has made an
election for a prior tax year and the
election has not been terminated or
revoked). The election is made by
computing taxable income as a RIC on
Form 1120-RIC.
General Requirements To
Qualify as a RIC
The term “regulated investment company”
applies to any domestic corporation that:
• Is registered throughout the tax year as
a management company or unit
investment trust under the Investment
Company Act of 1940 (ICA),
• Has an election in effect under the ICA
to be treated as a business development
company, or
• Is a common trust fund or similar fund
that is neither an investment company
under section 3(c)(3) of the ICA nor a
common trust fund as defined under
section 584(a).
Other Requirements
In addition, the RIC must meet the
income test, the asset test, and the
distribution requirements explained
below.
The income test: At least 90% of its
gross income must be derived from the
following items:
• Dividends,
• Interest (including tax-exempt interest
income),
• Payments with respect to securities
loans (as defined in section 512(a)(5)),
• Gains from the sale or other disposition
of stock or securities (as defined in ICA
section 2(a)(36)) or foreign currencies,
• Other income (including gains from
options, futures, or forward contracts)
derived from the RIC’s business of
investing in such stock, securities, or
currencies, and
• Net income derived from an interest in
a qualified publicly traded partnership (as
defined in section 851(h)).
Income from a partnership or trust
qualifies under the 90% test to the extent
the RIC’s distributive share of such
income is from items described above as
realized by the partnership or trust.
Income that a RIC receives in the
normal course of business as a
New for 2007
reimbursement from its investment
advisor is qualifying income for purposes
of the 90% test if the reimbursement is
includible in the RIC’s gross income.
The asset test:
1. At the end of each quarter of the
RIC’s tax year, at least 50% of the value
of its assets must be invested in the
following items.
• Cash and cash items (including
receivables),
• Government securities,
• Securities of other RICs, and
• Securities of other issuers, except
that the investment in a single issuer of
securities may not exceed 5% of the
value of the RIC’s assets or 10% of the
outstanding voting securities of the issuer
(except as provided in section 851(e)).
2. At the end of each quarter of the
RIC’s tax year, no more than 25% of the
value of the RIC’s assets may be invested
in the securities of:
• A single issuer (excluding
government securities or securities of
other RICs),
• Two or more issuers controlled by
the RIC and engaged in the same or
related trades or businesses, or
• One or more qualified publicly
traded partnerships as defined in section
851(h).
See sections 851(b)(3) and 851(c) for
further details.
Distribution requirements. The RIC’s
deduction for dividends paid for the tax
year (as defined in section 561, but
without regard to capital gain dividends)
equals or exceeds the sum of:
• 90% of its investment company taxable
income determined without regard to
section 852(b)(2)(D); and
• 90% of the excess of the RIC’s interest
income excludable from gross income
under section 103(a) over its deductions
disallowed under sections 265 and
171(a)(2).
A RIC that does not satisfy the
distribution requirements will be
CAUTION subject to taxation as a C
corporation.
!
Earnings and profits. The RIC must
either have been a RIC for all tax years
ending after November 7, 1983, or, at the
end of the current tax year, had no
accumulated earnings and profits from
any non-RIC tax year.
Note. For this purpose, current year
distributions are treated as made from the
earliest earnings and profits accumulated
in any non-RIC tax year. See section
852(c)(3). Also see section 852(e) for
procedures that may allow the RIC to
Where To File
File the RIC’s return at the applicable IRS address listed below.
If the RIC’s principal
business, office, or agency
is located in:
Connecticut, Delaware, District
of Columbia, Illinois, Indiana,
Kentucky, Maine, Maryland,
Massachusetts, Michigan, New
Hampshire, New Jersey, New
York, North Carolina, Ohio,
Pennsylvania, Rhode Island,
South Carolina, Vermont,
Virginia, West Virginia,
Wisconsin
And the total assets at the
end of the tax year (Form
1120-RIC, page 1, item D)
are:
Use the following Internal
Revenue Service Center
address:
Less than $10 million
Cincinnati, OH 45999-0012
$10 million or more
Ogden, UT 84201-0012
Alabama, Alaska, Arizona,
Arkansas, California, Colorado,
Florida, Georgia, Hawaii,
Idaho, Iowa, Kansas,
Louisiana, Minnesota,
Mississippi, Missouri, Montana,
Nebraska, Nevada, New
Mexico, North Dakota,
Oklahoma, Oregon, South
Dakota, Tennessee, Texas,
Utah, Washington, Wyoming
Any amount
A foreign country or U.S.
possession
Any amount
Ogden, UT 84201-0012
P.O. Box 409101
Ogden, UT 84409
A group of corporations with members located in more than one service center area
will often keep all the books and records at the principal office of the managing
corporation. In this case, file the tax returns with the service center for the area in which
the principal office of the managing corporation is located.
-2-
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Instructions for Form 1120-RIC
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avoid disqualification for the initial year if
the RIC did not meet this requirement.
Definition of a Fund
The term “fund” refers to a separate
portfolio of assets, whose beneficial
interests are owned by the holders of a
class or series of stock of the RIC that is
preferred over all other classes or series
for that portfolio of assets.
When To File
Generally, a RIC must file its income tax
return by the 15th day of the 3rd month
after the end of its tax year. A new RIC
filing a short period return must generally
file by the 15th day of the 3rd month after
the short period ends. A RIC that has
dissolved must generally file by the 15th
day of the 3rd month after the date of
dissolution.
If the due date falls on a Saturday,
Sunday, or legal holiday, the RIC may file
its return on the next business day.
Private delivery services
RICs can use certain private delivery
services designated by the IRS to meet
the “timely mailing as timely filing/paying”
rule for tax returns and payments.
These private delivery services include
only the following.
• DHL Express (DHL): DHL Same Day
Service, DHL Next Day 10:30 am, DHL
Next Day 12:00 pm, DHL Next Day 3:00
pm, and DHL 2nd Day Service.
• Federal Express (FedEx): FedEx
Priority Overnight, FedEx Standard
Overnight, FedEx 2Day, FedEx
International Priority, and FedEx
International First.
• United Parcel Service (UPS): UPS Next
Day Air, UPS Next Day Air Saver, UPS
2nd Day Air, UPS 2nd Day Air A.M., UPS
Worldwide Express Plus, and UPS
Worldwide Express.
The private delivery service can tell
you how to get written proof of the mailing
date.
Private delivery services cannot
deliver items to P.O. boxes. You
CAUTION must use the U.S. Postal Service
to mail any item to an IRS P.O. box
address.
!
Extension of time to file
To request an extension of time to file, file
Form 7004, Application for Automatic
6-Month Extension of Time To File
Certain Business Income Tax,
Information, and Other Returns, where
you file your return. Generally, file Form
7004 by the regular due date of the RIC’s
income tax return.
Who Must Sign
The return must be signed and dated by:
• The president, vice president,
treasurer, assistant treasurer, chief
accounting officer or
• Any other corporate officer (such as tax
officer) authorized to sign.
If a return is filed on behalf of a RIC
by a receiver, trustee, or assignee, the
fiduciary must sign the return, instead of
the corporate officer. Returns and forms
signed by a receiver or trustee in
bankruptcy on behalf of a RIC must be
accompanied by a copy of the order or
instructions of the court authorizing
signing of the return or form.
Note. If this return is being filed for a
series fund (as defined in section
851(g)(2)), the return may be signed by
any officer authorized to sign for the RIC
in which the fund is a series.
If an employee of the RIC completes
Form 1120-RIC, the paid preparer’s
space should remain blank. A preparer
who does not charge the RIC to prepare
Form 1120-RIC should not complete that
section. Generally, anyone who is paid to
prepare the return must sign it and fill in
the “Paid Preparer’s Use Only” area.
The paid preparer must complete the
required preparer information and:
• Sign the return in the space provided
for the preparer’s signature.
• Give a copy of the return to the
corporation.
Note. A paid preparer may sign original
or amended returns by rubber stamp,
mechanical device, or computer software
program.
Paid Preparer
Authorization
If the RIC wants to allow the IRS to
discuss its 2007 tax return with the paid
preparer who signed the return, check the
“Yes” box in the signature area of the
return. This authorization applies only to
the individual whose signature appears in
the “Paid Preparer’s Use Only” section of
the RIC’s return. It does not apply to the
firm, if any, shown in that section.
If the “Yes” box is checked, the RIC is
authorizing the IRS to call the paid
preparer to answer any questions that
may arise during the processing of its
return. The RIC is also authorizing the
paid preparer to:
• Give the IRS any information that is
missing from the return,
• Call the IRS for information about the
processing of the return or the status of
any related refund or payment(s), and
• Respond to certain IRS notices about
math errors, offsets, and return
preparation.
The RIC is not authorizing the paid
preparer to receive any refund check,
bind the RIC to anything (including any
additional tax liability), or otherwise
represent the RIC before the IRS.
The authorization will automatically
end no later than the due date (excluding
extensions) for filing the RIC’s 2008 tax
return. If the RIC wants to expand the
paid preparer’s authorization or revoke
the authorization before it ends, see Pub.
947, Practice Before the IRS and Power
of Attorney.
-3-
Assembling the Return
To ensure that the RIC’s tax return is
correctly processed, attach all schedules
and other forms after page 4, Form
1120-RIC, in the following order.
1. Schedule N (Form 1120).
2. Schedule O (Form 1120).
3. Form 4626.
4. Form 4136.
5. Additional schedules in alphabetical
order.
6. Additional forms in numerical order.
Complete every applicable entry space
on Form 1120-RIC. Do not enter “See
attached” instead of completing the entry
spaces. If more space is needed on the
forms or schedules, attach separate
sheets using the same size and format as
the printed forms. If there are supporting
statements and attachments, arrange
them in the same order as the schedules
or forms they support and attach them
last. Show the totals on the printed forms.
Enter the RIC’s name and EIN on each
supporting statement or attachment.
Depository Methods
of Tax Payment
The RIC must pay the tax due in full no
later than the 15th day of the 3rd month
after the end of the tax year. Generally,
this date falls on March 15th after the
close of the REIT’s tax year. The two
methods of depositing RIC income taxes,
including the capital gains tax, are
discussed below.
Electronic Deposit Requirement
The RIC must make electronic deposits of
all depository taxes (such as employment
tax, excise tax, and corporate income tax)
using the Electronic Federal Tax Payment
System (EFTPS) in 2008 if:
• The total deposits of such taxes in
2006 were more than $200,000 or
• The RIC was required to use EFTPS in
2007.
If the RIC is required to use EFTPS
and fails to do so, it may be subject to a
10% penalty. If the RIC is not required to
use EFTPS, it may participate voluntarily.
To enroll in or receive more information
about EFTPS, call 1-800-555-4477. To
enroll online, visit www.eftps.gov.
Depositing on time. For EFTPS
deposits to be made timely, the RIC must
initiate the transaction at least 1 business
day before the date the deposit is due.
Deposits With Form 8109
If the RIC does not use EFTPS, deposit
RIC income tax payments (and estimated
tax payments) with Form 8109, Federal
Tax Deposit Coupon. If the RIC does not
have a preprinted Form 8109, use Form
8109-B to make deposits. You can get
this form by calling 1-800-829-4933 or
visiting an IRS taxpayer assistance
center. Have the RIC’s EIN ready when
you call or visit.
Do not send deposits directly to an IRS
office; otherwise, the RIC may have to
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pay a penalty. Mail or deliver the
completed Form 8109 with the payment
to an authorized depositary (such as a
commercial bank or other financial
institution authorized to accept federal tax
deposits). Make checks or money orders
payable to the depositary.
If the RIC prefers, it may mail the
coupon and payment to:
Financial Agent, Federal Tax Deposit
Processing
P.O. Box 970030
St. Louis, MO 63197
Make the check or money order payable
to “Financial Agent.”
To help ensure proper crediting, enter:
• the RIC’s EIN;
• the tax period to which the deposit
applies, and
• “Form 1120-RIC” on the check or
money order.
Darken the “1120” box under “Type of
Tax” and the appropriate “Quarter” box
under “Tax Period” on the coupon.
Records of these deposits will be sent to
the IRS. For more information, see
“Marking the Proper Tax Period” in the
instructions for Form 8109.
For more information on deposits, see
the instructions in the coupon booklet
(Form 8109) and Pub. 583, Starting a
Business and Keeping Records.
If the RIC owes tax when it files
Form 1120-RIC, do not include the
CAUTION payment with the tax return.
Instead, mail or deliver the payment with
Form 8109 to an authorized depositary or
use EFTPS, if applicable.
!
Estimated Tax Payments
Generally, the following rules apply to the
RIC’s payments of estimated tax.
• The RIC must make installment
payments of estimated tax if it expects its
total tax for the year (less applicable
credits) to be $500 or more.
• The installments are due by the 15th
day of the 4th, 6th, 9th, and 12th months
of the tax year. If any date falls on a
Saturday, Sunday, or legal holiday, the
installment is due on the next regular
business day.
• Use Form 1120-W, Estimated Tax for
Corporations, as a worksheet to compute
estimated tax.
• If the RIC does not use EFTPS, use the
deposit coupons (Forms 8109) to make
deposits of estimated tax.
• If the RIC overpaid its estimated tax, it
may be able to get a quick refund by filing
Form 4466, Corporation Application for
Quick Refund of Overpaid Estimated Tax.
The overpayment must be at least 10% of
the REIT’s expected income tax liability
and at least $500.
For more information, including
penalties, see the Line 29. Estimated Tax
Penalty instructions.
Interest and Penalties
Interest. Interest is charged on taxes
paid late even if an extension of time to
file is granted. Interest is also charged on
penalties imposed for failure to file,
negligence, fraud, substantial valuation
misstatements, substantial
understatements of tax, and reportable
transaction understatements from the due
date (including extensions) to the date of
payment. The interest charge is figured at
a rate determined under section 6621.
Late filing of return. A RIC that does
not file its tax return by the due date,
including extensions, may be penalized
5% of the unpaid tax for each month or
part of a month the return is late, up to a
maximum of 25% of the unpaid tax. The
minimum penalty for a return that is over
60 days late is the smaller of the tax due
or $100. The penalty will not be imposed
if the RIC can show that the failure to file
on time was due to reasonable cause.
RICs that file late must attach a statement
explaining the reasonable cause.
Late payment of tax. A RIC that does
not pay the tax when due generally may
be penalized 1/2 of 1% of the unpaid tax
for each month or part of a month the tax
is not paid, up to a maximum of 25% of
the unpaid tax. The penalty will not be
imposed if the RIC can show that the
failure to pay on time was due to
reasonable cause.
Trust fund recovery penalty. This
penalty may apply if certain excise,
income, social security, and Medicare
taxes that must be collected or withheld
are not collected or withheld, or these
taxes are not paid. These taxes are
generally reported on:
• Form 720, Quarterly Federal Excise
Tax Return;
• Form 941, Employer’s Quarterly
Federal Tax Return;
• Form 943, Employer Annual Federal
Tax Return for Agricultural Employees; or
• Form 945, Annual Return of Withheld
Federal Income Tax.
The trust fund recovery penalty may
be imposed on all persons who are
determined by the IRS to have been
responsible for collecting, accounting for,
and paying over these taxes, and who
acted willfully in not doing so. The penalty
is equal to the unpaid trust fund tax. See
the Instructions for Form 720, or
Publication 15 (Circular E), Employer’s
Tax Guide, for details, including the
definition of responsible persons..
Other penalties. Other penalties can be
imposed for negligence, substantial
understatement of tax, reportable
transaction understatements, and fraud.
See sections 6662, 6662A, and 6663.
Accounting Methods
Figure taxable income using the method
of accounting regularly used in keeping
the RIC’s books and records. In all cases,
the method used must clearly show
taxable income.
-4-
Generally, permissible methods
include:
• Cash,
• Accrual, or
• Any other method authorized by the
Internal Revenue Code.
Accrual method. Generally, a RIC must
use the accrual method of accounting if
its average annual gross receipts exceed
$5 million. See section 448(c).
Under the accrual method, an amount
is includible in income when:
1. All the events have occurred that fix
the right to receive the income, which is
the earliest of the date:
a. the required performance takes
place,
b. payment is due, or
c. payment is received, and
2. The amount can be determined
with reasonable accuracy.
See Regulations section 1.451-1(a) for
details and Publication 538, Accounting
Periods and Methods.
Mark-to-market accounting method.
Generally, dealers in securities must use
the mark-to-market accounting method
described in section 475. Under this
method, any security that is inventory to
the dealer must be held at its fair market
value (FMV).
Any security held by a dealer that is
not inventory and held at the close of the
tax year is treated as sold at its FMV on
the last business day of the tax year. Any
resulting gain or loss must be taken into
account that year in determining gross
income. The gain or loss taken into
account is generally treated as ordinary
gain or loss.
For details, including exceptions, see
section 475, the related regulations, and
Rev. Rul. 94-7, 1994-1 C.B. 151.
Dealers in commodities and traders in
securities and commodities may elect,
with some exceptions, to use the
mark-to-market accounting method. To
make the election, the RIC must file a
statement describing the election, the first
tax year the election is to be effective,
and in the case of an election for traders
in securities or commodities, the trade or
business for which the election is made.
Except for new taxpayers, the statement
must be filed by the due date (not
including extensions) of the income tax
return for the tax year immediately
preceding the election year and attached
to that return, or if applicable, to a request
for an extension of time to file that return.
For more details, see Rev. Proc. 99-17,
1999-1 C.B. 503, and sections 475(e) and
(f).
Change in accounting method. To
change its method of accounting used to
report taxable income (for income as a
whole or for the treatment of any material
item), the RIC must file Form 3115,
Application for Change in Accounting
Method. For more information, see Form
3115.
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Section 481(a) adjustment. The RIC
may have to make an adjustment under
section 481(a) to prevent amounts of
income or expenses from being
duplicated or omitted. This is referred to
as a “section 481(a) adjustment.” The
section 481(a) adjustment period is
generally 1 year for a net negative
adjustment and 4 years for a net positive
adjustment. However, a RIC may elect to
use a 1-year adjustment period if the net
section 481(a) adjustment for the change
is less than $25,000. The RIC must
complete the appropriate lines of Form
3115 to make the election.
Include any net positive section
481(a) adjustment on page 1, line 7.
Report any negative adjustment on page
1, line 22.
Accounting Periods
A RIC must figure its taxable income on
the basis of a tax year. A tax year is the
annual accounting period a RIC uses to
keep its records and report its income and
expenses. RICs can use a calendar year
or a fiscal year.
For more information about accounting
periods, see Regulations sections 1.441-1
and 1.441-2.
Change of tax year. Generally, a RIC
must receive consent from the IRS before
changing its tax year. To obtain the
consent, file Form 1128, Application To
Adopt, Change, or Retain a Tax Year.
However, under certain conditions, a RIC
may change its tax year without obtaining
the consent.
For more information on change of tax
year, see Form 1128 and Regulations
section 1.442-1.
Rounding Off to
Whole Dollars
A RIC may round off cents to whole
dollars on its return and schedules. If the
RIC does round to whole dollars, it must
round all amounts. To round, drop
amounts under 50 cents and increase
amounts from 50 cents to 99 cents to the
next dollar (for example, $1.39 becomes
$1 and $2.50 becomes $3).
If two or more amounts must be added
to figure the amount to enter on a line,
include cents when adding the amounts
and round off only the total.
Recordkeeping
Keep the RIC’s records for as long as
they may be needed for administration of
any provision of the Internal Revenue
Code. Usually, records that support an
item of income, deduction, or credit on the
return must be kept for 3 years from the
date the return is due or filed, whichever
is later. Keep records that verify the RIC’s
basis in property for as long as they are
needed to figure the basis of the original
or replacement property.
The RIC should keep copies of all filed
returns. They help in preparing future and
amended returns.
Other Forms That May Be
Required
In addition to Form 1120-RIC, the RIC
may have to file some of the following
forms. Also see Pub. 542, Corporations,
for an expanded list of forms the RIC may
be required to file.
Form 1096, Annual Summary and
Transmittal of U.S. Information Returns.
Use Form 1096 to transmit Forms 1099
and 5498 to the Internal Revenue
Service.
Form 1099-DIV, Dividends and
Distributions. Report certain dividends
and distributions.
Form 1099-INT, Interest Income. Report
interest income.
Form 2438, Undistributed Capital Gains
Tax Return, must be filed by the RIC if it
designates undistributed net long-term
capital gains under section 852(b)(3)(D).
Form 2439, Notice to Shareholder of
Undistributed Long-Term Capital Gains,
must be completed and a copy given to
each shareholder for whom the RIC paid
tax on undistributed net long-term capital
gains under section 852(b)(3)(D).
Form 3520, Annual Return To Report
Transactions With Foreign Trusts and
Receipt of Certain Foreign Gifts, is
required either if the RIC received a
distribution from a foreign trust or if the
RIC was a grantor of, transferor of, or
transferor to a foreign trust that existed
during the tax year. See Question 5 of
Schedule N (Form 1120).
Form 8613, Return of Excise Tax on
Undistributed Income of Regulated
Investment Companies. If the RIC is liable
for the 4% excise tax on undistributed
income under section 4982 or makes an
election under section 4982(e)(4), it must
file this return for the calendar year.
Form 8886, Reportable Transaction
Disclosure Statement. Use this form to
disclose information for each reportable
transaction in which the RIC participated.
Form 8886 must be filed for each tax year
that the federal income tax liability of the
RIC is affected by its participation in the
transaction. The following are reportable
transactions.
1. Any listed transaction, which is a
transaction that is the same as, or
substantially similar to, a tax avoidance
transaction identified by the IRS.
2. Any transaction offered under
conditions of confidentiality for which the
RIC paid an advisor a fee of at least
$250,000.
3. Certain transactions for which the
RIC has contractual protection against
disallowance of the tax benefits.
4. Certain transactions resulting in a
loss of at least $10 million in any single
year or $20 million in any combination of
years.
5. Certain transactions resulting in a
book-tax difference of more than $10
million on a gross basis.
-5-
6. Certain transactions resulting in a
tax credit of more than $250,000, if the
RIC held the asset generating the credit
for 45 days or less.
Note. The RIC may have to pay a
penalty if it is required to file Form 8886
and fails to do so. See the Instructions for
Form 8886 for details and filing
requirements.
Statements
Safe harbor under Temporary
Regulations section 1.67-2T(j)(2).
Generally, shareholders in a nonpublicly
offered fund that are individuals or
pass-through entities are treated as
having received a dividend in an amount
equal to the shareholder’s allocable share
of affected RIC expenses for the calendar
year. They are also treated as having
paid or incurred an expense described in
section 212 (and subject to the 2%
limitation on miscellaneous itemized
deductions) in the same amount for the
calendar year.
Election. A nonpublicly offered fund may
elect to treat its affected RIC expenses for
a calendar year as equal to 40% of the
amount determined under Temporary
Regulations section 1.67-2T(j)(1)(i) for
that calendar year.
To make this election, attach to Form
1120-RIC for the tax year that includes
the last day of the calendar year for which
the fund makes the election a statement
that it is making an election under
Temporary Regulations section
1.67-2T(j)(2). Once made, the election
remains in effect for all subsequent
calendar years and may not be revoked
without IRS consent. See Temporary
Regulations section 1.67-2T for
definitions and other details.
Reportable transactions by material
advisors. Until further guidance is
issued, material advisors who provide
material aid, assistance, or advice with
respect to any reportable transaction,
must use Form 8264, Application for
Registration of a Tax Shelter, to disclose
reportable transactions in accordance
with interim guidance provided in Notice
2004-80, 2004-50 I.R.B. 963; Notice
2005-17, 2005-8 I.R.B. 606; and Notice
2005-22, 2005-12 I.R.B. 756.
Dual consolidated losses. If a
domestic corporation incurs a dual
consolidated loss (as defined in
Regulations section 1.1503-2(c)(5)), the
corporation (or consolidated group) may
need to attach an elective relief
agreement and/or an annual certification
as provided in Temporary Regulations
section 1.1503-2T(g)(2).
Notice to shareholders. A RIC must
notify its shareholders within 60 days after
the close of its tax year of the distribution
made during the tax year that qualifies for
the dividends-received deduction under
section 243. For purposes of the
dividends-received deduction, a capital
gain dividend received from a RIC is not
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Change to "2008."
treated as a dividend. The capital gain
dividend is treated as a long-term capital
gain by the shareholder.
Consent to partnership election to
close its books monthly. Certain
money market funds that obtain an
interest in an eligible partnership that
invests in assets exempt from taxation
under section 103 may be qualified to pay
exempt-interest dividends to their
shareholders. To qualify for payment of
exempt-interest dividends, a RIC must
meet the quarterly net asset value (NAV)
requirements under section 852(b)(5). To
maintain the required NAV at the end of
each quarter, the RIC may take into
account on a monthly basis its distributive
share of partnership items if the eligible
partnership makes a proper election to
close its books at the end of each month.
See Rev. Proc. 2002-16 for details.
Eligibility. A RIC is entitled to take
into account its distributive share of
partnership items on a monthly basis if:
• The RIC is entitled to hold itself out as
a money market fund, or an equivalent of
a money market fund.
• The RIC provides a statement to the
partnership that it consents to the
partnership’s election to close its books
monthly and that the RIC will include in its
taxable income its distributive share of
partnership items in a manner consistent
with the election. See Rev. Proc. 2002-16
for the required contents of the statement
of consent.
• The RIC provides the statement of
consent to the custodian or manager of
the partnership by the last day of the
second month after the month in which
the RIC acquires the partnership interest.
• The partnership is eligible under Rev.
Proc. 2002-16 to make the monthly
closing election and the election is
effective by the second month after the
month in which the RIC acquires the
partnership interest.
Statement of consent. The consent to a
partnership’s monthly closing election is
effective for the month in which the RIC
acquires the partnership interest, unless
the RIC requests that the consent be
effective for either of the two immediately
following calendar months. In addition to
timely providing the partnership with the
statement of consent, the statement
should be filed with Form 1120-RIC for
the first tax year in which the consent is
effective. The monthly closing consent
(and the partnership’s election) may be
revoked only with the consent of the
Commissioner. However, the RIC’s
consent becomes ineffective on any day
when the RIC ceases to be an eligible
partner and the partnership’s monthly
closing election is terminated as of the
first day of any month the partnership is
no longer eligible for the election under
Rev. Proc. 2002-16. For more details, see
the Revenue Procedure.
Specific Instructions
Period Covered
File the 2007 return for calendar year
2007 and fiscal years that begin in 2007.
For a fiscal year return, fill in the tax year
space at the top of the form.
Note. The 2007 Form 1120-RIC may
also be used if:
• The RIC has a tax year of less than 12
months that begins and ends in 2007 and
• The 2007 Form 1120-RIC is not
available at the time the RIC is required to
file its return.
The RIC must show its 2007 tax year
on the 2006 Form 1120-RIC and take into
account any tax law changes that are
effective for tax years beginning after
December 31, 2006.
Change to "2007."
Name and Address
Type or print the RIC’s true name (as set
forth in the charter or other legal
document creating it) and address on the
appropriate lines. Include the suite, room,
or other unit number after the street
address. If the post office does not deliver
mail to the street address and the RIC
has a P.O. box, show the box number
instead.
If the RIC receives its mail in care of a
third party (such as an accountant or an
attorney), enter on the street address line
“C/O” followed by the third party’s name
and street address or P.O. box.
Item B. Date RIC Was
Established
If this return is being filed for a series fund
(as described in section 851(g)(2)), enter
the date the fund was created. Otherwise,
enter the date the RIC was incorporated
or organized.
Item C. Employer
Identification Number (EIN)
Enter the RIC’s EIN. If the RIC does not
have an EIN, it must apply for one. An
EIN may be applied for:
• Online — Click on the EIN link at www.
irs.gov/businesses/small. The EIN is
issued immediately once the application
information is validated.
• By telephone at 1-800-829-4933 from
7:00 a.m. to 10:00 p.m. in the RIC’s local
time zone.
• By mailing or faxing Form SS-4,
Application for Employer Identification
Number.
If the RIC has not received its EIN by
the time the return is due, write “Applied
for” and the date you applied in the space
for the EIN. See the Instructions for Form
SS-4 for details.
Item D. Total Assets
Enter the RIC’s total assets (as
determined by the accounting method
regularly used in keeping the fund’s
-6-
books and records) at the end of the tax
year. If there are no assets at the end of
the tax year, enter -0-.
Item E. Final Return, Name
Change, Address Change,
or Amended Return
• If this is the RIC’s final return, file Form
1120-RIC and check the “Final return”
box.
• If the RIC has changed its name since
it last filed a return, check the box for
“Name change.” Generally, a RIC must
also have amended its articles of
incorporation and filed the amendment
with the state in which it was
incorporated.
• If the RIC has changed its address
since it last filed a return (including a
change to an “in care of” address), check
the box for “Address change.”
Note. If a change in address occurs after
the return is filed, use Form 8822,
Change of Address, to notify the IRS of
the new address.
• If the RIC is amending its return, check
the box for “Amended return,” complete
the entire return, correct the appropriate
lines with the new information, and
refigure the RIC’s tax liability. Attach a
statement that explains the reason for the
amendments and identifies the lines
being changed on the amended return.
Part I—Investment
Company Taxable Income
Income
Line 1. Dividends. A RIC that is the
holder of record of any share of stock on
the record date for a dividend payable on
that stock must include the dividend in
gross income by the later of: the date the
share became ex-dividend, or the date
the RIC acquired the share.
Line 2. Interest. Enter taxable interest
on U.S. obligations and on loans, notes,
mortgages, bonds, bank deposits,
corporate bonds, tax refunds, etc.
Do not offset interest expense against
interest income. Special rules apply to
interest income from certain
below-market-rate loans. See section
7872 for more information on the tax
treatment of loans on which inadequate or
no interest is charged.
Note. Report tax-exempt interest income
on Schedule K, item 8. Also, if required,
include the same amount on Schedule
M-1, line 7.
Line 3. Net Foreign Currency Gain or
(Loss) from Section 988 Transactions.
Enter the net foreign currency gain (loss)
from section 988 transactions treated as
ordinary income or loss under section
988(a)(1)(A). Attach a schedule detailing
each separate transaction.
Line 4. Payments with respect to
securities loans. Enter the amount
received or accrued from a broker as
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compensation for securities loaned by the
RIC to the broker for use in completing
market transactions. The payments must
meet the requirements of section
512(a)(5).
Line 5. Excess of Net Short-Term
Capital Gain Over Net Long-Term
Capital Loss. Enter the amount from
Schedule D (Form 1120), line 12. Every
sale or exchange of a capital asset must
be reported in detail on Schedule D (Form
1120), even if no gain or loss is indicated.
Line 7. Other Income. Enter any other
taxable income (loss) not reported on
lines 1 through 6, except net capital gain
reported in Part II. List the type and
amount of income on an attached
schedule. If the RIC has only one item of
other income, describe it in parentheses
on line 7. Examples of other income to
report on line 7 include:
• Gross rents.
• Recoveries of fees or expenses in
settlement or litigation.
• Amounts received or accrued as
consideration for entering into
agreements to make real property loans
or to purchase or lease real property.
• Recoveries of bad debts deducted in
prior years under the specific charge-off
method.
• Refunds of taxes deducted in prior
years to the extent they reduced income
subject to tax in the year deducted (see
section 111). Do not offset current year
taxes against prior year tax refunds.
• The recapture amount under section
280F if the business use of listed property
drops to 50% or less. To figure the
recapture amount, complete Part IV of
Form 4797.
• Ordinary income from trade or business
activities of a partnership (from Schedule
K-1 (Form 1065 or 1065-B)). Do not offset
ordinary losses against ordinary income.
Instead, include the losses on line 22.
Show the partnership’s name, address,
and EIN on a separate statement
attached to this return. If the amount
entered is from more than one
partnership, identify the amount from
each partnership.
• Any net positive section 481 income
adjustment. See Form 3115 and its
instructions for more information.
Deductions
Limitations on Deductions
Transactions between related
taxpayers. Generally, an accrual basis
taxpayer may only deduct business
expenses and interest owed to a related
party in the year the payment is includible
in the income of the related party. See
section 267 for limitations on deductions
for interest and expenses paid to a
related party.
Golden parachute payments. A portion
of the payments made by a RIC to key
personnel that exceeds their usual
compensation may not be deductible.
This occurs when the RIC has an
agreement (golden parachute) with key
employees to pay them an amount
substantially in excess of their base
amount if control of the RIC changes. See
section 280G and Regulations section
1.280G-1 for more information.
Business start-up and organizational
expenses. Business start-up and
organizational costs must be capitalized
unless an election is made to deduct or
amortize them. The RIC can elect to
amortize costs paid or incurred before
October 23, 2004, over a period of 60
months or more. However, for costs paid
or incurred after October 22, 2004, the
following rules apply (separately to each
category):
• The RIC can elect to deduct up to
$5,000 of such costs for the year the RIC
begins business operations.
• The $5,000 deduction is reduced (but
not below zero) by the amount the total
costs exceed $50,000. If the total costs
are $55,000 or more, the deduction is
reduced to zero.
• If the election is made, any costs not
deducted must be amortized ratably over
a 180-month period beginning with the
month the RIC begins business
operations.
For more details on the election for
business start-up costs and
organizational costs, see Pub. 535,
Business Expenses.
To make the election, attach the
statements required by Regulations
sections 1.195-1 and 1.248-1(c). Report
the deductible amount of these costs and
any amortization on line 22. For
amortization that begins during the tax
year, complete and attach Form 4562.
Section 265(a)(3) limitation. If the RIC
paid exempt-interest dividends during the
tax year (including those dividends
deemed paid under section 855), no
deduction is allowed for that portion of
otherwise deductible expenses allocable
to tax-exempt income. The excluded
amount is determined by the amount
tax-exempt income bears to total gross
income (including tax-exempt income but
excluding capital gain net income).
Net operating loss deduction. The net
operating loss deduction is not allowed.
Passive activity limitations. Limitations
on passive activity losses and credits
under section 469 apply to RICs that are
closely held (as defined in section
469(j)(1)). RICs subject to the passive
activity limitations must complete Form
8810, Corporate Passive Activity Loss
and Credit Limitations, to compute their
allowable passive activity loss and credit.
Before completing Form 8810, see
Temporary Regulations section 1.163-8T,
for rules on allocating interest expense
among activities.
Closely held corporation. A RIC is
closely held if at any time during the last
half of the tax year more than 50% in
value of its outstanding stock is directly or
indirectly owned by or for not more than
five individuals and it is not a personal
service corporation.
-7-
Line 9. Compensation of Officers.
Complete Schedule E if total receipts are
$500,000 or more. Total receipts are
figured by adding:
1. Line 8, Part I,
2. Net capital gain from line 1, Part II,
and
3. Line 9a, Form 2438.
Do not include compensation
deductible elsewhere on the return, such
as elective contributions to a section
401(k) cash or deferred arrangement, or
amounts contributed under a salary
reduction SEP agreement or a SIMPLE
IRA plan.
Include only the deductible part of
officers’ compensation on Schedule E.
Complete Schedule E, columns (a)
through (e), for all officers. The RIC
determines who is an officer under the
laws of the state where incorporated.
Disallowance of deduction for
employee compensation in excess of
$1 million. Publicly held corporations
may not deduct compensation to a
“covered employee” to the extent that the
compensation exceeds $1 million.
Generally, a covered employee is:
• The chief executive officer (or an
individual acting in that capacity) as of the
end of the tax year; or
• An employee whose total
compensation must be reported to
shareholders under the Securities
Exchange Act of 1934 because the
employee is among the four highest
compensated officers for that tax year
(other than the chief executive officer).
For this purpose, compensation does
not include:
• Income from certain employee trusts,
annuity plans, or pensions.
• Any benefit paid to an employee that is
excluded from the employee’s income.
The deduction limit does not apply to:
• Commissions based on individual
performance;
• Qualified performance-based
compensation; and
• Income payable under a written,
binding contract in effect on February 17,
1993.
The $1 million limit is reduced by
amounts disallowed as excess parachute
payments under section 280G.
For details, see section 162(m) and
Regulations section 1.162-27.
Line 10. Salaries and Wages. Enter the
salaries and wages paid for the tax year,
reduced by the amount claimed on:
• Line 2, section A and Line 6, Section B
of Form 5884-A, Credits for Employers
Affected by Hurricane Katrina, Rita, or
Wilma,
• Line 2 of Form 8844, Empowerment
zone and renewal community
employment credit,
• Line 2 of Form 5884, Work Opportunity
Credit;
• Line 4 of Form 8845, Indian
Employment Credit; and
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• Line 2 of Form 8861, Welfare-to-Work
Credit.
See the instructions for these forms for
more information.
Do not include salaries and wages
deductible elsewhere on the return, such
as elective contributions to a section
401(k) cash or deferred arrangement, or
amounts contributed under a salary
reduction SEP agreement or a SIMPLE
IRA plan.
If the RIC provided taxable fringe
benefits to its employees, such as
CAUTION personal use of a car, do not
deduct as wages any amounts deducted
elsewhere.
Line 11. Rents. If the RIC rented or
leased a vehicle, enter the total annual
rent or lease expense paid or incurred
during the year. Also, complete Part V of
Form 4562, Depreciation and
Amortization. If the RIC leased a vehicle
for a term of 30 days or more, the
deduction for the vehicle lease expense
may have to be reduced by an amount
called the inclusion amount.
The RIC may have an inclusion
amount if:
!
The lease term began:
And the
vehicle’s
FMV on
the first
day of the
lease
exceeded:
After 12/31/04 but before 1/1/07
$15,200
After 12/31/03 but before 1/1/05
$17,500
If the lease term began before January 1, 2002, see
Pub. 463, Travel, Entertainment, Gift, and Car
Expenses, to find out if the RIC has an inclusion
amount. The inclusion amount for lease terms
beginning in 2007 will be published in the Internal
Revenue Bulletin in early 2007. . . . . . . . . . . . . .
See Pub. 463 for instructions on
figuring the inclusion amount.
Line 12. Taxes and Licenses. Enter
taxes paid or accrued during the tax year,
but do not include the following:
• Federal income taxes (except for the
tax imposed on net recognized built-in
gain allocable to ordinary income).
• Foreign or U.S. possession income
taxes if a foreign tax credit is claimed, or if
the RIC made an election under section
853.
• Excise taxes imposed under section
4982 on undistributed RIC income.
• Taxes not imposed on the RIC.
• Taxes, including state or local sales
taxes, that are paid or incurred in
connection with an acquisition or
disposition of property (these taxes must
be treated as a part of the cost of the
acquired property or, in the case of a
disposition, as a reduction in the amount
realized on the disposition).
• Taxes assessed against local benefits
that increase the value of the property
assessed (such as for paving, etc.).
• Taxes deducted elsewhere on the
return.
See section 164(d) for apportionment
of taxes on real property between seller
and purchaser.
Line 13. Interest
!
Interest expense cannot be used
to offset interest income.
CAUTION
Interest allocation. The RIC must
make an interest allocation if the
proceeds of a loan were used for more
than one purpose (for example, to
purchase a portfolio investment and to
acquire an interest in a passive activity).
See Temporary Regulations section
1.163-8T for the interest allocation rules.
The following interest is not deductible:
• Interest on indebtedness incurred or
continued to purchase or carry obligations
if the interest is wholly exempt from
income tax. For exceptions, see section
265(b).
• For cash basis taxpayers, prepaid
interest allocable to years following the
current tax year.
• Interest and carrying charges on
straddles. Generally, these amounts must
be capitalized. See section 263(g).
Special rules apply to:
• Interest on which no tax is imposed
(see section 163(j)).
• Original issue discount on certain
high-yield discount obligations (see
section 163(e)(5)(C) to figure the
disqualified portion).
• The deduction for interest when the
RIC is a policyholder or beneficiary with
respect to a life insurance, endowment, or
annuity contract issued after June 8,
1997. For details, see section 264(f).
Attach a statement showing the
computation of the deduction.
Line 14. Depreciation. Include on line
14 the part of the cost that the RIC
elected to expense under section 179 for
certain property placed in service during
tax year 2006 or carried over from 2005.
See Form 4562 and its instructions to
figure the amount of depreciation to enter
on this line.
Line 22. Other Deductions
Penalties or fines paid to any
government agency or
CAUTION instrumentality because of a
violation of a law are not deductible. See
Chapter 11, Other Expenses, in
Publication 535 for additional information.
Attach a schedule listing by type and
amount all allowable deductions that are
not specifically deductible elsewhere on
the return. Generally, a deduction may
not be taken for any amount that is
allocable to tax-exempt income. See
section 265(b) for exceptions.
Examples of other deductions include:
• Amortization. See Form 4562.
• Certain business start-up and
organizational costs the RIC elects to
amortize or deduct.
• Supplies used and consumed in the
business.
• Utilities.
!
-8-
• Ordinary losses from trade or business
activities of a partnership (from Schedule
K-1 (Form 1065 or 1065-B)). Do not offset
ordinary income against ordinary losses.
Instead, include the income on line 7.
Show the partnership’s name, address,
and EIN on a separate statement
attached to this return. If the amount is
from more than one partnership, identify
separately the amount from each
partnership.
• Any extraterritorial income exclusion
(from Form 8873, line 54).
• Any net negative section 481(a)
adjustment.
Charitable contributions. Enter
contributions or gifts actually paid within
the tax year to or for the use of charitable
and governmental organizations
described in section 170(c) and any
unused contribution carryovers.
RICs reporting taxable income on the
accrual method may elect to treat as paid
during the tax year any contributions paid
by the 15th day of the 3rd month after the
end of the tax year if the contributions
were authorized by the board of directors
during the tax year. Attach a declaration
to the return that includes the date the
resolution was adopted.
Limitation on deduction. The total
amount claimed cannot be more than
10% of taxable income computed without
regard to the following:
• Any deduction for contributions.
• The special deductions on line 25,
relating to dividends paid.
• The deduction allowed under section
249, relating to any premium paid or
incurred upon the repurchase of a
convertible bond.
Carryover. Charitable contributions
over the 10% limitation cannot be
deducted for the tax year but may be
carried over to the next 5 tax years
subject to certain limitations.
For more information on charitable
contributions, including substantiation and
recordkeeping requirements, see the
regulations under section 170 and Pub.
526, Charitable Contributions.
Contributions to organizations
conducting lobbying activities.
Contributions made to an organization
that conducts lobbying activities are not
deductible if:
• The lobbying activities relate to matters
of direct financial interest to the donor’s
trade or business and
• The principal purpose of the
contribution was to avoid federal income
tax by obtaining a deduction for activities
that would have been nondeductible
under the lobbying expense rules if
conducted directly by the donor.
For information on contributions to
charitable organizations that conduct
lobbying activities, see section 170(f)(9).
Pension, profit-sharing, etc., plans.
Report contributions to qualified pension,
profit-sharing, or other funded-deferred
compensation plans. Employers who
maintain such a plan generally must file
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Form 5500, Annual Return/Report of
Employee Benefit Plan, even if the plan is
not a qualified plan under the Internal
Revenue Code. The filing requirement
applies even if the RIC does not claim a
deduction for the current tax year. There
are penalties for failure to file these forms
on time and for overstating the pension
plan deduction. See sections 6652(e) and
6662(f).
Travel, meals, and entertainment.
Subject to certain limitations and
restrictions, the RIC can deduct ordinary
and necessary travel, meals, and
entertainment expenses incurred in its
trade or business.
Travel. The RIC cannot deduct travel
expenses of any individual accompanying
a corporate officer or employee unless:
• That individual is an employee of the
RIC and
• His or her travel is for a bona fide
business purpose that would otherwise be
deductible by that individual.
Meals and entertainment. Generally,
the RIC can deduct only 50% of the
amount otherwise allowable for meals
and entertainment expenses paid or
incurred in its trade or business.
Amounts treated as compensation.
Generally, the RIC may be able to deduct
otherwise nondeductible entertainment,
amusement or recreation expenses if the
amounts are treated as compensation to
the recipient and reported on Form W-2
for an employee or on Form 1099-MISC
for an independent contractor.
However, if the recipient is an officer,
director, or beneficial owner (directly or
indirectly) of more than 10% of any class
of stock, the deductible expense is
limited. See section 274(e)(2) and Notice
2005-45, 2005-24 I.R.B. 1228.
See section 274 and Pub. 463 for a
more extensive discussion of these
topics.
Lobbying expenses. Generally,
lobbying expenses are not deductible.
Examples of non-deductible expenses
include:
• Amounts paid or incurred in connection
with influencing federal or state legislation
(but not local legislation) or
• Amounts paid or incurred in connection
with any communication with certain
federal executive branch officials in an
attempt to influence the official actions or
positions of the officials. See Regulations
section 1.162-29 for the definition of
“influencing legislation.”
Dues and other similar amounts paid
to certain tax-exempt organizations may
not be deductible. See section 162(e)(3).
Certain in-house lobbying expenditures
that do not exceed $2,000 are deductible.
For more information on other
deductions that may apply to RICs, see
Pub. 535.
Tax and Payments
Line 28b. Estimated tax payments.
Enter any estimated tax payments the
RIC made for the tax year.
Line 28f. Credit from Form 2439. Enter
the credit from Form 2439 for the RIC’s
share of the tax paid by another RIC or a
REIT on undistributed long-term capital
gains included in the RIC’s income.
Attach Form 2439 to Form 1120-RIC.
Line 28g. Credit for federal tax on
fuels. Complete and attach Form 4136,
Credit for Federal Tax Paid on Fuels, if
the RIC qualifies to take this credit.
Line 28h. Credit for federal telephone
excise tax paid. If the RIC was billed
after February 28, 2003, and before
August 1, 2006, for the federal telephone
excise tax on long distance or bundled
service, the RIC may be able to request a
credit for the tax paid. The RIC had
bundled service if its local and long
distance service was provided under a
plan that does not separately state the
charge for local service. The RIC cannot
request the credit if it has already
received a credit or refund from its service
provider. If the RIC requests the credit, it
cannot ask its service provider for a credit
or refund and must withdraw any request
previously submitted to its provider.
The RIC can request the credit by
attaching Form 8913, Credit for Federal
Telephone Excise Tax Paid, showing the
actual amount the RIC paid. The RIC also
may be able to request the credit based
on an estimate of the amount paid. See
Form 8913 for details. In either case, the
RIC must keep records to substantiate
the amount of the credit requested.
Backup withholding. If the RIC had
income tax withheld from any payments it
received, because, for example, it failed
to give the payer its correct EIN, include
the amount withheld in the total for line
28i. Show the amount withheld in the
blank space in the right-hand column
between lines 27 and 28i, and enter
“Backup Withholding.”
Line 29. Estimated tax penalty. A RIC
that does not make estimated tax
payments when due may be subject to an
underpayment penalty for the period of
underpayment. See the instructions for
Form 2220, Underpayment of Estimated
Tax by Corporations for more information.
Schedule A—Deduction
for Dividends Paid
Column (a) is used to determine the
deduction for dividends paid resulting
from income derived from ordinary
dividends.
Column (b) is used to determine the
deduction for dividends paid resulting
from income derived from capital gain
dividends.
Section 561 (taking into account
sections 852(b)(7), 852(c)(3)(B), and
855(a)) determines the deduction for
dividends paid. Do not take into account
exempt-interest dividends defined in
section 852(b)(5) or any amount reported
for the tax year on Form 2438, line 9b.
See Regulations section 1.852-11 for
-9-
information on post-October currency or
capital losses.
Line 3. Dividends, both ordinary and
capital gain, declared and payable to
shareholders of record in October,
November, or December are treated as
paid by the RIC and received by each
shareholder on December 31 of that
calendar year provided that they are
actually paid in January of the following
calendar year. Enter on line 3 all such
dividends not already included on line 1
or 2.
Line 5. Enter the foreign tax paid
deduction allowed as an addition to the
dividends paid deduction under section
853(b)(1)(B). See the instructions for Item
10 of Schedule K for information on the
election available under section 853(a).
Schedule B—Income From
Tax-Exempt Obligations
If, at the close of each quarter of the tax
year, at least 50% of the value of the
fund’s assets consisted of tax-exempt
obligations under section 103(a), the RIC
qualifies under section 852(b)(5) to pay
exempt-interest dividends for the tax year.
If this applies, check the “Yes” box on
line 1 and complete lines 2 through 5.
See section 852(b)(5)(A) for the definition
of exempt-interest dividends and other
details.
Schedule J—Tax
Computation
Line 1
A member of a controlled group must
check the box on line 1 and complete and
attach Schedule O (Form 1120). See
Schedule O and its instructions for more
information.
Line 2a–Tax on Investment
Company Taxable Income
Members of a controlled group must use
Schedule O (Form 1120) to figure the tax
for the group. Most corporations not filing
a consolidated return figure their tax by
using the Tax Rate Schedule below.
For a RIC that is not a personal
holding company (PHC). A RIC in
compliance with Regulations section
1.852-6 regarding disclosure of the RIC’s
actual stock ownership (members of a
controlled group should see the
instructions for Schedule O (Form 1120))
is not a PHC and should compute its tax
using the Tax Rate Schedule below:
Tax Rate Schedule
If the investment company taxable income
(line 26, page 1) is:
Over —
$0
But not
over —
$50,000
Of the
amount
over —
Tax is:
15%
$0
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50,000
75,000
100,000
335,000
10,000,000
15,000,000
18,333,333
75,000
$ 7,500 + 25%
100,000
13,750 + 34%
335,000
22,250 + 39%
10,000,000
113,900 + 34%
15,000,000 3,400,000 + 35%
18,333,333 5,150,000 + 38%
—
35%
50,000
75,000
100,000
335,000
10,000,000
15,000,000
0
For a RIC that is a personal holding
company. A RIC that is not in
compliance with Regulations section
1.852-6 is a PHC and is taxed at a flat
rate of 35% on its investment company
taxable income.
Line 2c–Alternative Minimum
Tax (AMT)
Unless the RIC is treated as a small
corporation exempt from the AMT, it may
owe the AMT if it has any of the
adjustments and tax preference items
listed on Form 4626, Alternative Minimum
Tax — Corporations. The RIC must file
Form 4626 if its investment company
taxable income (or loss), and retained
capital gains not designated under
section 852(b)(3)(D), plus adjustments
and tax preference items, is more than
the smaller of:
• $40,000 or
• The RIC’s allowable exemption amount
(from Form 4626).
See Form 4626 for definitions and
details on how to figure the tax.
Apportioning tax preference items.
Items of tax preference may be
apportioned by the RIC between the
entity and its shareholders in accordance
with IRC 59(d)(1)(A).
Line 2d—Income Tax
Deferred tax under section 1291. If the
RIC was a shareholder in a passive
foreign investment company (PFIC), and
received an excess distribution or
disposed of its investment in the PFIC
during the year, it must include the
increase in taxes due under section
1291(c)(2) in the total for line 2d. On the
dotted line to the left of line 2d write
“Section 1291” and the amount.
Do not include on line 2d any interest
due under section 1291(c)(3). Instead, if
this applies, show the amount of interest
owed in the bottom margin of page 1 and
write “Section 1291 interest.” For details,
see Form 8621, Return by a Shareholder
of a Passive Foreign Investment
Company or Qualified Electing Fund.
Additional tax under section 197(f). A
RIC that elects to pay tax on the gain
from the sale of an intangible under the
related person exception to the
anti-churning rules should include any
additional tax due under section
197(f)(9)(B) in the total for line 2d. On the
dotted line to the left of line 2d, write
“Section 197” and the amount.
Line 3a– Foreign Tax Credit
To find out when a RIC can claim the
credit for payment of income tax to a
foreign country or U.S. possession, see
Form 1118, Foreign Tax Credit —
Corporations. The RIC may not claim this
credit if an election under section 853 was
made for the tax year. See Election under
section 853(a), under Schedule K, Item
10.
Line 3b
If the RIC can claim the QEV credit,
discussed below, check the box and
include the amount of the credit in the
total for line 3b.
Qualified electric vehicle (QEV) credit.
Use Form 8834, Qualified Electric Vehicle
Credit, if the RIC can claim a credit for the
purchase of a qualified electric vehicle
placed in service in 2006.
Line 3c–General Business
Credit
Enter on line 3c the RIC’s total general
business credit.
If the RIC is filing Form 8844,
Empowerment Zone and Renewal
Community Employment Credit, check
the “Form(s)” box, enter 8844 in the
space provided, and include the allowable
credit on line 3c.
If the RIC is required to file Form 3800,
General Business Credit, check the “Form
3800” box and include the allowable
credit on line 3c. If the RIC is not required
to file Form 3800, check the “Form(s)”
box, write the form number in the space
provided, and include on line 3c the
allowable credit from the applicable form.
Line 3d–Other Credits
Minimum tax credit. To figure the
minimum tax credit and any carryforward
of that credit, use Form 8827, Credit for
Prior Year Minimum Tax — Corporations.
Line 5– Personal Holding
Company Tax
A RIC is taxed as a personal holding
company under section 542 if:
• At least 60% of its adjusted ordinary
gross income for the tax year is personal
holding company income, and
• At any time during the last half of the
tax year more than 50% in value of its
outstanding stock is owned, directly or
indirectly, by five or fewer individuals.
See the Instructions for Schedule PH
(Form 1120), U.S. Personal Holding
Company (PHC) Tax, for definitions and
details on how to figure the tax.
Line 6–Other Taxes
Include any of the following taxes and
interest in the total on line 6. Check the
appropriate box(es) for the form, if any,
used to compute the total.
Recapture of Investment Credit. If the
RIC disposed of investment credit
property or changed the property’s use
before the end of its useful life or recovery
period, it may owe a tax. See Form 4255,
Recapture of Investment Credit, for
details.
Recapture of Low-Income Housing
Credit. If the RIC disposed of property
(or there was a reduction in the qualified
basis of the property) for which it took the
-10-
low-income housing credit, it may owe a
tax. See Form 8611, Recapture of
Low-Income Housing Credit, and IRC
section 42(j)(1) for more information.
Other. Additional tax and interest
amounts can be included in the total
entered on line 6. Check the box for
“Other” if the RIC includes any of the
taxes and interest discussed below. See
How to report, below, for details on
reporting these amounts on an attached
schedule.
1. Recapture of qualified electric
vehicle credit. The RIC must recapture
part of the QEV credit it claimed in a prior
year if, within 3 full years of the date the
vehicle was placed in service, it ceases to
qualify for the credit. See Regulations
section 1.30-1 for details on how to figure
the recapture.
2. Recapture of Indian employment
credit. Generally, if an employer
terminates the employment of a qualified
employee less than 1 year after the date
of initial employment, any Indian
employment credit allowed for a prior tax
year because of wages paid or incurred to
that employee must be recaptured. For
details, see Form 8845 and section 45A.
3. Recapture of new markets credit
(see Form 8874 and Regulations section
1.45D-1(e) for details).
4. Recapture of employer-provided
childcare facilities and services credit
(see Form 8882 and section 45F(d) for
details).
5. Interest due on deferred gain
recognition (section 1260(b)).
How to report. If the RIC checked the
“Other” box, attach a schedule showing
the computation of each item included in
the total for line 6, Schedule J; identify the
applicable code section and the type of
tax or interest.
Built-in gains tax. (See worksheet). If,
on or after January 2, 2002, property of a
C corporation becomes property of a RIC
by either (a) the qualification of the C
corporation as a RIC or (b) the transfer of
such property to a RIC, then the RIC will
be subject to the built-in gains tax under
section 1374 unless the C corporation
elects deemed sale treatment on the
transferred property. If the C corporation
does not make this election, the RIC must
pay tax on the net recognized built-in gain
during the 10-year period beginning on its
first day as a RIC or the day it acquired
the property. Recognized built-in gains
and losses generally retain their character
(for example, ordinary income or capital
gain) and are treated the same as other
gains or losses of the RIC. The RIC’s tax
on net recognized built-in gain is treated
as a loss sustained by the RIC after
October 31 of the same tax year (see the
instructions for line i of the Built-in Gains
Tax Worksheet on page 12). See
Regulations section 1.337(d)-7 for details.
Different rules apply to elections to be
a RIC and to transfers of property in a
carryover basis transaction that occurred
prior to January 2, 2002. For RIC
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elections and property transfers before
this date, the C corporation is subject to
deemed sale treatment on the transferred
property unless the RIC elects section
1374 treatment. See Regulations section
1.337(d)-6 for information on how to make
the election and figure the tax for RIC
elections and property transfers before
this date. The RIC may also rely on
Regulations section 1.337(d)-5 for RIC
elections and property transfers that
occurred before January 2, 2002.
Worksheet instructions. Complete
the worksheet on page 12 to figure the
built-in gains tax under Regulations
section 1.337(d)-7 or 1.337(d)-6.
Line a. Enter the amount that would
be the taxable income of the RIC for the
tax year if only recognized built-in gain,
recognized built-in loss, and recognized
built-in gain carryover were taken into
account.
Line b. Add the amounts shown on
page 1, line 24; Part II, line 1; and Form
2438, line 11. For this purpose, refigure
line 24 on page 1 without regard to any
election under section 852(b)(2)(F). Enter
the result on line b of the worksheet.
Line c. The RIC’s net unrealized
built-in gain is the amount, if any, by
which the FMV of the assets of the RIC at
the beginning of its first RIC year (or as of
the date the assets were acquired, for any
asset with a basis determined by
reference to its basis (or the basis of any
other property) in the hands of a C
corporation) exceeds the aggregate
adjusted basis of such assets at that time.
Enter on line c the net unrealized
built-in gain reduced by the net
recognized built-in gain for prior years.
See sections 1374(c)(2) and (d)(1).
Line d. If the amount on line b
exceeds the amount on line a, the excess
is treated as a recognized built-in gain in
the succeeding tax year.
Line e. Enter the section 1374(b)(2)
deduction. Generally, this is any net
operating loss or capital loss carryforward
(to the extent of net capital gain included
in recognized built-in gain for the tax year)
arising in tax years for which the RIC was
a C corporation. A capital loss
carryforward must be used to reduce
recognized built-in gain for the tax year to
the greatest extent possible before it can
be used to reduce the investment
company taxable income.
Line h. Credit carryforwards arising in
tax years for which the RIC was a C
corporation must be used to reduce the
tax on net built-in gain for the tax year to
the greatest extent possible before the
credit carryforwards can be used to
reduce the tax on the investment
company taxable income.
Line i. The RIC’s tax on the net
recognized built-in gain is treated as a
loss sustained by the RIC after October
31 of the same tax year. Deduct the tax
attributable to:
• Ordinary gain as a deduction for taxes
on Form 1120-RIC, line 12.
• Short-term capital gain as a short-term
capital loss on Schedule D (Form 1120),
line 1.
• Long-term capital gain as a long-term
capital loss on Schedule D (Form 1120),
line 6.
Line 7–Total Tax
Include any deferred tax on the
termination of a section 1294 election
applicable to shareholders in a qualified
electing fund in the amount entered on
line 7. See Form 8621, Part V, and “How
to report,” below.
Subtract from the total for line 7 the
deferred taxes on the RIC’s share of the
undistributed earnings of a qualified
electing fund (see Form 8621, Part II).
How to report. Attach a schedule
showing the computation of each item
included in, or subtracted from, the total
for line 7. On the dotted line next to line 7,
enter the amount of tax or interest,
identify it as tax or interest, and specify
the code section that applies.
Schedule K–Other
Information
The following instructions apply to
questions 1 through 11. Complete all
items that apply.
Question 3
Check the “Yes” box if the RIC is a
subsidiary in a parent-subsidiary
controlled group. This applies even if the
RIC is a subsidiary member of one group
and the parent corporation of another.
Note. If the RIC is an “excluded
member” of a controlled group (see
section 1563(b)(2)), it is still considered a
member of a controlled group for this
purpose.
Question 5
Check the “Yes” box if one foreign person
owned at least 25% of (a) the total voting
power of all classes of stock of the RIC
entitled to vote or (b) the total value of all
classes of stock of the RIC.
The constructive ownership rules of
section 318 apply in determining if a RIC
is foreign owned. See section 6038A(c)(5)
and the related regulations.
Enter on line 5b(1) the percentage
owned by the foreign person specified in
question 5. For line 5b(2), enter the name
of the owner’s country.
Note. If there is more than one
25%-or-more foreign owner, complete
lines 5b(1) and 5b(2) for the foreign
person with the highest percentage of
ownership.
Foreign person. The term “foreign
person” includes:
• A foreign citizen or nonresident alien.
• An individual who is a citizen of a U.S.
possession (but who is not a U.S. citizen
or resident).
• A foreign partnership.
• A foreign corporation.
• Any foreign estate or trust within the
meaning of section 7701(a)(31).
• A foreign government (or one of its
agencies or instrumentalities) to the
extent that it is engaged in the conduct of
a commercial activity as described in
section 892.
Owner’s country. For individuals, the
term “owner’s country” means the country
of residence. For all others, it is the
country where incorporated, organized,
created, or administered.
Requirement to file Form 5472. If the
RIC checked “Yes,” it may have to file
Form 5472, Information Return of a 25%
Foreign Owned U.S. Corporation or a
Foreign Corporation Engaged In a U.S.
Trade or Business. Generally, a 25%
foreign-owned corporation that had a
reportable transaction with a foreign or
domestic related party during the tax year
must file Form 5472. See Form 5472 for
filing instructions.
Item 8
Tax-exempt interest. Show any
tax-exempt interest received or accrued.
Include any exempt-interest dividends
Built-in Gains Tax Worksheet (keep for your records)
a.
b.
c.
d.
e.
f.
g.
h.
i.
Excess of recognized built-in gains over recognized built-in losses . . . . . . . . . . . . . . . . . . . . . . .
Taxable income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter the net unrealized built-in gain reduced by any net recognized built-in gain for all prior years
Net recognized built-in gain (enter the smallest of lines a, b, or c) . . . . . . . . . . . . . . . . . . . . . . .
Section 1374(b)(2) deduction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Subtract line e from line d. If zero, enter -0- here and on line i . . . . . . . . . . . . . . . . . . . . . . . . . . .
Enter 35% of line f . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business credit and minimum tax credit carryforwards under section 1374(b)(3) from C corporation
Tax. Subtract line h from line g (if zero or less, enter -0-). Enter here and include on line 6 of
Schedule J (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
-11-
a.
b.
c.
d.
e.
f.
g.
h.
i.
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received as a shareholder in a mutual
fund or other RIC.
Item 10
Election under section 853(a). A RIC
may make an irrevocable election under
section 853(a) to allow its shareholders to
apply their share of the foreign taxes paid
by the RIC either as a credit or a
deduction. If the RIC makes this election,
the amount of foreign taxes it paid during
the tax year may not be taken as a credit
or a deduction on Form 1120-RIC, but
may be claimed on Form 1120-RIC,
Schedule A, line 5, as an addition to the
dividends-paid deduction.
Eligibility. To qualify to make the
election, the RIC must meet the following
requirements.
• More than 50% of the value of the
RIC’s total assets at the end of the tax
year must consist of stock or securities in
foreign corporations.
• The RIC must meet the holding period
requirements of section 901(k) with
respect to its common and preferred
stock. If the RIC fails to meet these
holding period requirements, the election
that allows a RIC to pass through to its
shareholders the foreign tax credits for
foreign taxes paid by the RIC is
disallowed. Although the foreign taxes
paid may not be taken as a credit by
either the RIC or the shareholder, they
are still deductible at the fund level.
To make a valid election, in addition to
timely filing Form 1120-RIC and checking
the box for item 10, the RIC must file:
• Form 1099-DIV and Form 1096,
including the statement required by
Regulations section 1.853-4; and
• Form 1118, modified to become a
statement supporting the RIC’s election.
Notification. If the RIC makes the
election, it must furnish to its
shareholders a written notice designating
the shareholder’s share of foreign taxes
paid to each country or possession and
the share of the dividend that represents
income derived from sources within each
country or possession. The notice must
be mailed to the shareholders no later
than 60 days after the end of the RIC’s
tax year.
For further information, see
Regulations section 1.853-4.
Line 1. Cash. Include certificates of
deposit as cash on line 1.
Line 4. Tax-Exempt Securities. Include
on this line:
1. State and local government
obligations, the interest on which is
excludible from gross income under
section 103(a), and
2. Stock in another mutual fund or
RIC that distributed exempt-interest
dividends during the tax year of the RIC.
Line 24. Adjustments to Shareholders’
Equity. Examples of adjustments to
report on this line include:
• Unrealized gains and losses on
securities held “available for sale.”
• Foreign currency translation
adjustments.
• The excess of additional pension
liability over unrecognized prior service
cost.
• Guarantees of employee stock (ESOP)
debt.
• Compensation related to employee
stock award plans.
If the total adjustment to be entered on
line 24 is a negative amount, enter the
amount in parentheses.
Schedule M–1
Reconciliation of Income (Loss)
per Books With Income per
Return
Line 5d. Travel and Entertainment.
Include on line 5d any of the following:
• Meals and entertainment not deductible
under section 274(n).
• Expenses for the use of an
entertainment facility.
• The part of business gifts over $25.
• Expenses of an individual over $2,000,
which are allocable to conventions on
cruise ships.
• Employee achievement awards over
$400.
• The cost of entertainment tickets over
face value (also subject to the 50% limit
under section 274(n)).
• The cost of skyboxes over the face
value of nonluxury box seat tickets.
• The part of luxury water travel not
deductible under section 274(m).
• Expenses for travel as a form of
education.
Schedule L–Balance
Sheets per Books
The balance sheet should agree with the
RIC’s books and records.
-12-
• Other nondeductible travel and
entertainment expenses.
For more information, see Pub. 542,
Corporations.
Line 7. Tax-Exempt Interest. Include as
interest on line 7 any exempt-interest
dividends received by the RIC as a
shareholder in a mutual fund or other
RIC.
Privacy Act and Paperwork Reduction
Act Notice. We ask for the information
on this form to carry out the Internal
Revenue laws of the United States. You
are required to give us the information.
We need it to ensure that you are
complying with these laws and to allow us
to figure and collect the right amount of
tax. Section 6109 requires return
preparers to provide their identifying
numbers on the return.
You are not required to provide the
information requested on a form that is
subject to the Paperwork Reduction Act
unless the form displays a valid OMB
control number. Books or records relating
to a form or its instructions must be
retained as long as their contents may
become material in the administration of
any Internal Revenue law. Generally, tax
returns and return information are
confidential, as required by section 6103.
The time needed to complete and file
this form will vary depending on individual
circumstances. The estimated average
time is:
Recordkeeping . . . . . . . 57 hr., 9 min.
Learning about the law
or the form . . . . . . . . . . 20 hr., 43 min.
Preparing the form . . . . 36 hr., 16 min.
Copying, assembling,
and sending the form to
the IRS . . . . . . . . . . . . .
4 hr., 1 min.
If you have comments concerning the
accuracy of these time estimates or
suggestions for making this form simpler,
we would be happy to hear from you. You
can write to the Internal Revenue Service;
Tax Products Coordinating Committee;
SE:W:CAR:MP:T:T:SP; 1111 Constitution
Ave., NW; IR-6406; Washington, DC
20224. Do not send the tax form to this
office. Instead, see “Where To File” on
page 3.
| File Type | application/pdf |
| File Title | C:\Batch\Users\Pagersvc[DS]\I1120RIC.cvt |
| File Modified | 2007-08-23 |
| File Created | 2007-07-23 |