U.S. Income Tax Return for Regulated Investment Companies

U.S. Income Tax Return for Regulated Investment Companies

Draft Instructions 1120RIC

U.S. Income Tax Return for Regulated Investment Companies

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2012
Department of the Treasury
Internal Revenue Service

Instructions for
Form 1120-RIC
U.S. Income Tax Return for Regulated
Investment Companies
Converted to schema — Triveni 9/26/2011

Section references are to the Internal Revenue Code
unless otherwise noted.

Contents
What's New . . . . . . . . . . . . . . . . . . . . . . . . 2
Photographs of Missing Children . . . . . . . . 3
Unresolved Tax Issues . . . . . . . . . . . . . . . . 3
How To Get Forms and Publications . . . . . 3
General Instructions

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Purpose of Form . . . . . . . . . . . . . . . . . . . . 4
Who Must File . . . . . . . . . . . . . . . . . . . . . . . 4
General Requirements To Qualify as a
RIC . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Other Requirements . . . . . . . . . . . . . . . . . . 5
Definition of a Fund . . . . . . . . . . . . . . . . . . 7
When To File . . . . . . . . . . . . . . . . . . . . . . . 7
Who Must Sign . . . . . . . . . . . . . . . . . . . . . . 9
Paid Preparer Authorization . . . . . . . . . . . 10
Assembling the Return . . . . . . . . . . . . . . . 10
Tax Payments . . . . . . . . . . . . . . . . . . . . . . 11
Estimated Tax Payments . . . . . . . . . . . . . 12
Interest and Penalties . . . . . . . . . . . . . . . 12
Accounting Methods . . . . . . . . . . . . . . . . 13
Accounting Periods . . . . . . . . . . . . . . . . . 14

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Rounding Off to Whole Dollars . . . . . . . . . 15
Recordkeeping . . . . . . . . . . . . . . . . . . . . . 15
Other Forms That May Be Required . . . . . 15
Statements . . . . . . . . . . . . . . . . . . . . . . . . 16
Specific Instructions

............... 0

Period Covered . . . . . . . . . . . . . . . . . . . . 20
Name and Address . . . . . . . . . . . . . . . . . . 20
Item B. Date RIC Was Established . . . . . . 21
Item C. Employer Identification Number
(EIN) . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item D. Total Assets . . . . . . . . . . . . . . . . . 21
Item E. Final Return, Name Change,
Address Change, or Amended
Return . . . . . . . . . . . . . . . . . . . . . . . . 22
Part I—Investment Company Taxable
Income . . . . . . . . . . . . . . . . . . . . . . . . 22
Part II — Tax on Undistributed Net
Capital Gain Not Designated Under
Section 852(b)(3)(D) . . . . . . . . . . . . . 33
Schedule A—Deduction for Dividends
Paid . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Schedule B—Income From Tax-Exempt
Obligations . . . . . . . . . . . . . . . . . . . . . 34
Schedule J—Tax Computation . . . . . . . . . 35
Schedule K–Other Information . . . . . . . . . 42
Schedule L–Balance Sheets per Books

...............................

Schedule M–1 . . . . . . . . . . . . . . . . . . . . . . 45
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.
Future Developments
.
For the latest information about developments related to
Form 1120-RIC and its instructions, such as legislation
enacted after this form and instructions were published,
go to
www.irs.gov/form1120ric.

Tax imposed under sections 851(d)(2) and
851(i).

.
For tax years beginning in 2012, RICs must now report
the tax(es) imposed for relief from failure to meet the

Qualified "fund of funds"
On Schedule B, line 1, in the case of a qualified "fund of
funds" structure, a RIC may pay exempt-interest dividends
without regard to the requirement that at least 50% of the
value of the funds assets consist of tax-exempt obligations.
See section 852(g) for more information.
On Schedule K, line 10b, in the case of a qualified "fund of
funds" structure, a RIC may elect to allow shareholders the
foreign tax credit without regard to the requirement that
more than 50% of the value of its assets consist of stock or
securities in foreign corporations. See section 852(g) for
more information.

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asset test and/or the gross income test on line 2c of
Schedule J. See the instructions for Schedule J, line 2c.
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Built-in gains.

.
For tax years beginning in 2012 or 2013, the recognition
period for the built-in gains tax is a 5-year period. See
the Built-in Gains Tax, later.

.
Photographs of Missing
Children

.
The Internal Revenue Service is a proud partner with
the National Center for 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.

.
Unresolved Tax Issues

.
The Taxpayer Advocate Service (TAS) is an
independent organization within the IRS whose
employees assist taxpayers who are experiencing
economic harm, who are seeking help in resolving tax
problems that have not been resolved through normal
channels, or who believe that an IRS system or
procedure is not working as it should. The service is
free, confidential, tailored to meet your needs, and is
available for businesses, as well as individuals.
.
A RIC can contact the TAS as follows.
.
Call the TAS toll-free line at 1-877-777-4778 to see if
the RIC is eligible for assistance. Individuals who are
deaf, hard of hearing, or have a speech disability and
who have access to TTY/TDD equipment can call
1-800-829-4059.
.
Call or write the RIC's local taxpayer advocate,
whose phone number and address are listed in the local
telephone directory and in Pub. 1546, Taxpayer
Advocate Service – Your Voice at the IRS.
.
File Form 911, Request for Taxpayer Advocate
Assistance (And Application for Taxpayer Assistance
Order), or ask an IRS employee to complete it on the
RIC's behalf.
.
For more information, go to www.irs.gov/
advocate.

.
How To Get Forms
and Publications
Internet.

.
You can access the IRS website 24 hours a day, 7 days
a week, at IRS.gov to:
.
Download forms, instructions, and publications;
.
Order IRS products online;
.
Research your tax questions online;
.
Search publications online by topic or keyword;

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View Internal Revenue Bulletins (IRBs) published in
recent years; and
.
Sign up to receive local and national tax news by
email.

IRS tax products DVD.

.
You can order Pub. 1796, IRS Tax Products DVD, and
obtain the following.
.
Current year forms, instructions, and publications.
.
Prior year forms, instructions, and publications.
.
Internal Revenue Code – Title 26 of the U.S. Code.
.
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.
.
Toll-free and email technical support.
.
Two releases during the year.
— The first release will ship early in January.
— The final release will ship early in March.
.
Buy the DVD from the National Technical Information
Service (NTIS) at www.irs.gov/
cdorders for $30 (no handling fee) or call
1-877-233-6767 toll-free to buy the DVD for $30 (plus a
$6 handling fee).

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.

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

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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 (1) income test, (2)
asset test, and (3) 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 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.
.
A RIC that fails to meet the requirements of section
851(b)(2) will still be considered to have satisfied the
requirements of this test if:
.
Following the RIC's identification of the failure, a
description of each item of its gross income described is
set forth in a statement for the tax year.
.
Failure to meet the requirements of this test is due to
reasonable cause and not due to willful neglect.

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

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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.
.
3. A RIC that fails to meet the requirements of
section 851(b)(3) for a quarter shall be considered to
have satisfied the requirements of this test if:
.
After the RIC identifies that it did not satisfy the asset
test, the RIC must provide a description of each asset
that causes the RIC to fail to satisfy the requirements at
the close of the quarter.
.
The failure to meet the requirements of section
851(b)(3) is due to reasonable cause and not due to
willful neglect.
.
The RIC disposes of the assets set forth on the
statement within 6 months after the last day of the
quarter that the RIC identified the failure.
.
4. De minimis failures. A RIC that fails to meet the
requirements of section 851(b)(3) for a quarter shall be
considered to have satisfied the requirements of this
test if:
.
Such failure is due to ownership of assets that the
total value does not exceed:
.
a. One percent of the total value of the RIC's assets
at the end of the quarter for which the measurement is
done, or
.
b. $10,000,000, and
.
c. The RIC disposes of the asset following the
identification of the failure within 6 months after the last
day of the quarter in which the RIC identified the failure.

.
Note. For special rules regarding failure to meet

the requirements of the income and asset tests, see
section 851(d)(2).
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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 subject to taxation as a C
corporation.

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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.
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.
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 avoid
disqualification for the initial year if the RIC did not meet
this requirement.

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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.

.
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.
.
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.
.
For the IRS mailing address to use if you are using a
private delivery service, go to IRS.gov and enter “private
delivery service” in the search box.
.
The private delivery service can tell you how to get
written proof of the mailing date.

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Private delivery services cannot deliver items
to P.O. boxes. You must use the U.S. Postal
CAUTION
Service to mail any item to an IRS P.O. box
address.

.
Extension of Time To File
.
File Form 7004, Application for Automatic Extension of
Time To File Certain Business Income Tax, Information,
and Other Returns, to request a 6-month extension of
time to file. Generally, the corporation must file Form
7004 by the regular due date of the return.

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Where To File
.
File the RIC's return at the applicable IRS address listed below.

And the total assets at
.
If the RIC's principal
the end of the tax year
business, office, or agency (Form 1120-RIC, page
is located in:
1, item D) are:
.
Connecticut, Delaware,
Less than $10 million
District of Columbia, Florida,
Georgia, Illinois, Indiana,
Kentucky, Maine, Maryland,
Massachusetts, Michigan,
New Hampshire, New Jersey,
New York, North Carolina,
.
Ohio, Pennsylvania, Rhode
$10 million or more
Island, South Carolina,
Tennessee, Vermont,
Virginia, West Virginia,
Wisconsin
.
Alabama, Alaska, Arizona,
Arkansas, California,
Colorado, Hawaii, Idaho,
Iowa, Kansas, Louisiana,
Minnesota, Mississippi,
Any amount
Missouri, Montana,
Nebraska, Nevada, New
Mexico, North Dakota,
Oklahoma, Oregon, South
Dakota, Texas, Utah,
Washington, Wyoming

Use the following address:
Department of the Treasury
Internal Revenue Service Center
Cincinnati, OH 45999-0012

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0012

Department of the Treasury
Internal Revenue Service Center
Ogden, UT 84201-0012

.
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.

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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

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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 Use
Only” section.
.
The paid preparer must complete the required
preparer information and:
.
Sign the return in the space provided for the
preparer's signature; and
.
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.

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Paid Preparer
Authorization

.
If the RIC wants to allow the IRS to discuss its 2012 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 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
2012 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.

.
Assembling the Return

.
To ensure that the RIC's tax return is correctly
processed, attach all schedules, statements, and other
forms after page 4, Form 1120-RIC, in the following
order.
.
1. Schedule N (Form 1120).
.
2. Schedule D (Form 1120).
.
3. Schedule O (Form 1120).
.
4. Form 4626.

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5. Form 4136.
.
6. Additional schedules in alphabetical order.
.
7. Additional forms in numerical order.
.
8. Supporting statements and attachments.
.
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.

.
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.

.
Electronic Deposit Requirement

.
RICs must use electronic funds transfer to make all
federal tax deposits (such as deposits of employment,
excise, and corporate income tax). Generally, electronic
funds transfers are made using the Electronic Federal
Tax Payment System (EFTPS). However, if the RIC
does not want to use EFTPS, it can arrange for its tax
professional, financial institution, payroll service, or
other trusted third party to make deposits on its behalf.
Also, it may arrange for its financial institution to initiate
a same-day tax wire payment (discussed below) on its
behalf. EFTPS is a free service provided by the
Department of the Treasury. Services provided by a tax
professional, financial institution, payroll service, or
other third party may have a fee.
.
To get more information about EFTPS or to enroll in
EFTPS, visit www.eftps.gov, or call 1-800-555-4477
(TTY/TDD 1-800-733-4829).

Depositing on time.

.
For deposits made by EFTPS to be on time, the RIC
must initiate the deposit by 8 p.m. Eastern time the day
before the date the deposit is due. If the RIC uses a
third party to make deposits on its behalf, they may
have different cutoff times.

Same-day payment option.

.
If the RIC fails to initiate a deposit transaction on EFTPS
by 8 p.m. Eastern time on the day before the date a
deposit is due, it can still make the deposit on time by
using the Federal Tax Application (FTA). Before using
the same-day payment option, the RIC will need to
make arrangements with its financial institution ahead of
time. Please check with the financial institution
regarding availability, deadlines, and costs. To learn
more about making a same-day payment and download

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the Same-Day Payment Worksheet, visit www.eftps.gov.
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.
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.
.
The RIC must use electronic funds transfer to make
installment payments of estimated tax.
.
Use Form 1120-W, Estimated Tax for Corporations,
as a worksheet to compute estimated tax. See the
Instructions for Form 1120-W.
.
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 Overpayment of
Estimated Tax. The overpayment must be at least 10%
of the RIC's expected income tax liability and at least
$500.
.
For more information, including penalties, see the
instructions for line 29, Estimated tax penalty, later.

.
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 $135. The penalty will not
be imposed if the RIC can show that the failure to file on
time was due to 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

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imposed if the RIC can show that the failure to pay on
time was due to reasonable cause.
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Reasonable cause determinations.

.
If the RIC receives a notice about a penalty after it files
its return, send the IRS an explanation and we will
determine if the RIC meets the reasonable cause
criteria. Do not attach an explanation when the RIC's
return is filed.

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 944, Employer's ANNUAL Federal Tax Return;
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 be
responsible for collecting, accounting for, and paying
over these taxes, and who acted willfully in not doing so.
The penalty is equal to the full amount of the unpaid
trust fund tax. See the Instructions for Form 720 or Pub.
15 (Circular E), 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 reflect
taxable income.
.
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,

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.
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) and Pub. 538,
Accounting Periods and Methods, for details.

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. 97-39, 1997-39
I.R.B. 4.
.
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, 1999-7 I.R.B. 52, and sections 475(e) and
(f).

Change in accounting method.

.
Generally, the RIC must get IRS consent to change the
method of accounting used to report taxable income (for
income as a whole or for the treatment of any material
item). To do so, the RIC must file Form 3115,
Application for Change in Accounting Method. See
Form 3115 and Pub. 538 for more information.
.
There are some instances when the RIC can obtain
automatic consent from the IRS to change to certain
accounting methods. See Rev. Proc. 2011-14, 2011-4
I.R.B. 330, as modified and clarified by Rev. Proc.
2012-19, 2012-14 I.R.B. 689, and Rev. Proc. 2012-20,
2012-14 I.R.B. 700, or any successor. Also, see the
Instructions for Form 3115.

.
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

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about accounting periods, see Regulations sections
1.441-1 and 1.441-2.
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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.
.
See the Instructions for Form 1128 and Pub. 538 for
more information on accounting periods and tax years.

.
Rounding Off to
Whole Dollars

.
A RIC can 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 and in the
calculation of earnings and profits.

.
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.

.
Claim for Deficiency Dividends Deductions by a
Personal Holding Company, Regulated Investment
Company, or Real Estate Investment Trust. Use this
form to claim a deficiency dividend under section 860.

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.
Annual Summary and Transmittal of U.S. Information
Returns. Use Form 1096 to transmit Forms 1099 and
5498 to the Internal Revenue Service.

.
Dividends and Distributions. Report certain dividends
and distributions.

.
Interest Income. Report interest income.

.
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).

.
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).

.
Annual Return to Report Transactions With Foreign
Trusts and Receipt of Certain Foreign Gifts, may be
required if the RIC received a distribution from, was a
grantor of, or transferor to, a foreign trust during the tax
year. See Question 5 of Schedule N (Form 1120).

.
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.

.
Determination Under 860(e)(4) by a Qualified
Investment Entity. Use Form 8927 to establish a
determination date under Section 860(e)(4) for
purposes of making a deficiency dividend distribution.

Reportable transaction disclosure statement.
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.
Disclose information for each reportable transaction in
which the RIC participated. Form 8886, Reportable
Transaction Disclosure Statement, 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 one of the
types of transactions that the IRS has determined to be
a tax avoidance transaction and identified by notice,

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regulation, or other published guidance as a listed
transaction.
.
2. Any transaction offered under conditions of
confidentiality for which the RIC (or a related party) paid
an advisor a fee of at least $250,000.
.
3. Certain transactions for which the RIC (or a
related party) 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. Any transaction identified by the IRS by notice,
regulation, or other published guidance as a
“transaction of interest.” See Notice 2009-55, 2009-31
I.R.B. 170.

.
For more information, see Regulations section
1.6011-4. Also, see the Instructions for Form 8886.

.
Penalties. The RIC may have to pay a penalty if it

is required to disclose a reportable transaction under
section 6011 and fails to properly complete and file
Form 8886. Penalties may also apply under section
6707A if the RIC fails to file Form 8886 with its Form
1120-RIC, fails to provide a copy of Form 8886 to the
Office of Tax Shelter Analysis (OTSA), or files a form
that fails to include all the information required (or
includes incorrect information). Other penalties, such as
an accuracy-related penalty under section 6662A, may
also apply. See the Instructions for Form 8886 for
details on these and other penalties.
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Reportable transactions by material advisors.

.
Material advisors to any reportable transaction must
disclose certain information about the reportable
transaction by filing Form 8918, Material Advisor
Disclosure Statement, with the IRS. For details, see the
Instructions for Form 8918.

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

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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.

Transfers to a corporation controlled by the
transferor.

.
Every significant transferor (as defined in Regulations
section 1.351-3(d) that receives stock of a corporation
in exchange for property in a nonrecognition event must
include the statement required by Regulations section
1.351-3(a)) on or with the transferor's tax return for the
tax year of the exchange. The transferee corporation
must include the statement required by Regulations
section 1.351-3(b) on or with its return for the tax year of
the exchange, unless all the required information is
included in any statement(s) provided by a significant
transferor that is attached to the same return for the
same section 351 exchange. If the transferor or
transferee corporation is a controlled foreign
corporation, each U.S. shareholder (within the meaning
of section 951(b)) must include the required statement
on or with its return.

Distributions under section 355.

.
Every corporation that makes a distribution of stock or
securities of a controlled corporation, as described in
section 355 (or so much of section 356 as it relates to
section 355), must attach the statement required by
Regulations section 1.355-5 to its return for the year of
the distribution. If the distributing corporation is a
controlled foreign corporation, each U.S. shareholder
(within the meaning of section 951(b)), must include the
statement on or with its return.

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 Regulations section
1.1503-2(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 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

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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. 2003-84 for details.
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.
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.
2003-84 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. 2003-84
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. 2003-84. For more details, see the
Revenue Procedure.

Annual information statement for elections
under section 108(i).

.
If the RIC made an election in 2009 or 2010 to defer
income from cancellation of debt (COD) in connection
with the reacquisition of an applicable debt instrument,
the RIC must attach a statement to its return beginning
with the tax year following the tax year for which the RIC
made the election, and ending the first tax year all
income deferred has been included in income. The
statement must be labeled "Section108(i) Information
Statement" and must clearly identify, for each
applicable debt instrument to which an election under
section 108(i) applies, the following.
.
1. Any deferred COD income that is included in
income in the current tax year.

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.
2. Any deferred COD income that has been
accelerated because of an event described in section
108(i)(5)(D) and must be included in income in the
current tax year. Include a description and the date of
the acceleration event.
.
3. Any deferred COD income that has not been
included in income in the current or prior tax years.
.
4. Any deferred original issue discount (OID)
deduction allowed as a deduction in the current tax
year.
.
5. Any deferred OID deduction that is allowed as a
deduction in the current tax year because of an
accelerated event described in section 108(i)(5)(D).
.
6. Any deferred OID deduction that has not been
deducted in the current or prior tax years.
.
In addition, annually include a copy of the election
statement the RIC filed to make the election to defer the
income. For more information on deferring the income,
see the instructions for line 7. For more information
regarding the annual information statement, see Rev.
Proc. 2009-37, 2009-36 I.R.B. 309.

Other forms and statements.

.
See Pub. 542, Corporations, for a list of other forms and
statements a corporation may need to file in addition to
the forms and statements discussed throughout these
instructions.

Specific Instructions
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.
Period Covered

.
File the 2012 return for calendar year 2012 and fiscal
years that begin in 2012. For a fiscal year return, fill in
the tax year space at the top of the form.

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.
Note. The 2012 Form 1120-RIC may also be used

The RIC has a tax year of less than 12 months that
begins and ends in 2013; and
.
The 2013 Form 1120-RIC is not available at the time
the RIC is required to file its return.
The RIC must show its 2013 tax year information on
the 2012 Form 1120-RIC and take into account any tax
law changes that are effective for tax years beginning
after December 31, 2012.

.
Name and Address

.
Enter the RIC's true name (as set forth in the charter or
other legal document creating it), address, and EIN on
the appropriate lines. Enter the address of the RIC's
principal office or place of business. 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.

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.
Note. Do not use the address of the registered

agent for the state in which the RIC is incorporated. For
example, if a business is incorporated in Delaware or
Nevada and the RIC's principal office is located in Little
Rock, AR, the RIC should enter the Little Rock address.
Adopted employee suggestion in 2007 to include
specific instructions for Delaware and Nevada
corporations.
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.
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— visit IRS.gov
and click on the EIN link. The EIN is issued immediately
once the application information is validated.
.
By telephone at 1-800-829-4933, or at
1-800-829-4059 for individuals who are deaf, hard of
hearing, or have a speech disability and who have
access to TTY/TDD equipment.
.
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
books and records) at the end of the tax year. If there
are no assets at the end of the tax year, enter -0-.

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.
Item E. Final Return, Name
Change, Address Change,
or Amended Return
.

If this is the RIC's final return and it will no longer
exist, check the “Final return” box.
.
If the RIC has changed its name since it last filed a
return, check the “Name change” box. 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 “Address change” box.

.
Note. If a change in address occurs after the return

is filed, use Form 8822-B, Change of
Address—Business, to notify the IRS of the new
address.
d0e1617

Amended return.

.
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. Do not include tax-exempt interest
on line 2. Also, if required, include the same amount on
Schedule M-1, line 7.
.
Include interest income from tax credit bonds on
line 2. If the RIC elects to pass through the credits to

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shareholders, see the instructions for Part II,
Schedule A, line 7.

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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 statement detailing
each separate transaction.

Line 4. Payments with respect to securities
loans.

.
Enter the amount received or accrued from a broker as
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 16.
Every sale or exchange of a capital asset must be
reported even if no gain or loss is indicated.
.
If a RIC has a net capital loss for any tax year, the
excess of the net short-term capital loss over the net
long term capital gain shall be a short-term capital loss
arising on the first day of the next tax year. The excess
of the net long-term capital loss over the net short-term
capital gain shall be a long-term capital loss arising on
the first day of the next tax year. Also, there is no limit
on the number of tax years that a RIC is allowed to
carryover a net capital loss. See section 1212(a)(3) for
more information.

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 statement. 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

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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 due
to a change in method of accounting. See Form 3115
and its instructions for more information.
.
Part or all of the proceeds received from certain
corporate-owned life insurance contracts issued after
August 17, 2006. Corporations that own one or more
employer-owned life insurance contracts issued after
this date must file Form 8925, Report of
Employer-Owned Life Insurance Contracts. See section
101(j) for details.
.
Income from discharge of indebtedness for the
purchase of a debt instrument for less than its adjusted
issue price. However, for a reacquisition of an applicable
debt instrument after December 31, 2008, and before
January 1, 2011, a RIC can elect, under section 108(i),
to defer the income from discharge of indebtedness in
connection with the election.
.
If the RIC makes the election, the income is deferred
and ratably included in income over the 5-year period
beginning with:
.
1. For a reacquisition occurring in 2009, the fifth tax
year following the tax year in which the reacquisition
occurred, and
.
2. For a reacquisition occurring in 2010, the fourth
tax year following the tax year in which the reacquisition
occurred.
.
Once made, the election is irrevocable and the
exclusions for COD income under section 108(a)(1)(A),
(B), (C), and (D) do not apply for the tax year of the
election or any later tax year. For more information, see
section 108(i) and Rev. Proc. 2009-37. See the required
Annual information statement for elections under
section 108(i), discussed earlier. Also, see section
108(i)(5)(D) regarding any deferred COD income that
has been accelerated because of certain events and
must be included in income in the current year.
.
If the RIC is a direct or indirect partner in a
partnership, other special rules apply. See Temporary
Regulations section 1.108(i)-2T
.
The RIC's share of the following income from Form
8621, Information Return by a Shareholder of a Passive
Foreign Investment Company or Qualified Electing
Fund.
.
1. Ordinary earnings of a qualified electing fund
(QEF).
.
2. Gain or loss from marking passive foreign
investment company income (PFIC) stock to market.
.
3. Gain or loss from sale or other disposition of
Section 1296 stock.
.
4. Excess distributions from a section 1291 fund.
.
See the Instructions for Form 8621.

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.
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.
.
Also see the instructions for Form 8926, Disqualified
Corporate Interest Expense Disallowed Under Section
163(j) and Related Information, with respect to section
163(j).

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. Also, see the instructions for line 9.

Business start-up and organizational costs.

.
A RIC can elect to deduct up to $5,000 of business
start-up and up to $5,000 of organizational costs paid or
incurred after October 22, 2004. Any remaining cost
must be amortized. The $5,000 deductions 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. See sections 195(b)
and 248(a).

.
Time for making an election. The RIC

generally elects to deduct start-up or organizational
costs by claiming the deduction on its income tax return
filed by the due date (including extensions) for the tax
year in which the active trade or business begins.
However, for start-up or organizational costs paid or
incurred before September 9, 2008, the RIC may be
required to attach a statement to its return to elect to
deduct such costs. See Regulations sections 1.195-1
and 1.248-1 for details.
.
If the RIC timely filed its return for the year without
making an election, it can still make an election by filing
an amended return within 6 months of the due date of
the return (excluding extensions). Clearly indicate the
election on the amended return and write "Filed
pursuant to section 301.9100-2" at the top of the
amended return. File the amended return at the same
address the RIC filed its original return. The election
applies when figuring taxable income for the current tax
year and all subsequent years.

.
Note. The RIC can choose to forgo the elections

above by clearly electing to capitalize its start-up or
organizational costs on an income tax return filed by the
due date (including extensions) for the tax year in which
the active trade or business begins.

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.
Report the deductible amount of such costs and any
amortization on line 22. For amortization that begins
during the 2012 tax year, complete and attach Form
4562.
.
For more details on business start-up and
organizational costs, see Pub. 535, Business Expenses.

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.
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Line 9. Compensation of Officers.

.
Enter the deductible officer's compensation on line 9.
The RIC determines who is an officer under the laws of
the state where incorporated. 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.
.
If the RIC's total receipts are $500,000 or more, total
receipts by adding:
.
1. Line 8, Part I,
.
2. Net capital gain from line 1, Part II, and
.
3. Line 9a, Form 2438.

.
Disallowance of deduction for employee
compensation in excess of $1 million. Publicly

held corporations cannot deduct compensation to a
“covered employee” to the extent that the compensation
exceeds $1 million. Generally, a covered employee is:
.
The principal executive officer (or an individual acting
in that capacity) as of the end of the tax year; or
.
A principal employee whose total compensation must
be reported to shareholders under the Securities
Exchange Act of 1934 because the employee is among

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the three highest compensated officers for that tax year
(other than the principal 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. Also, see Notice 2007-49, 2007-25
I.R.B. 1429.

Line 10. Salaries and Wages.

.
Enter the salaries and wages paid for the tax year,
reduced by the amount claimed on:
.
Form 5884, Work Opportunity Credit,
.
Form 8844, Empowerment Zone Employment Credit,
.
Form 8845, Indian Employment Credit, and
.
Form 8932, Credit for Employer Differential Wage
Payments.
.
See the instructions for these forms for more
information.
.
Do not include salaries and wages deductible
elsewhere on the return, such as amounts included in
officer's compensation, 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 personal use of a car, do
CAUTION
not deduct as wages any amounts deducted
elsewhere.

2013-21, table 5

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:

.
After 12/31/07 but before 1/1/13

And the vehicle's
FMV on the first
day of the lease
exceeded:
$18,500

14
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2013-21
.
The lease term began:

.
After 12/31/06 but before 1/1/08
.
After 12/31/04 but before 1/1/07
.
After 12/31/03 but before 1/1/05

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.
If the lease term began before January 1, 2004, 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 2013
will be published in the Internal Revenue Bulletin in early 2013.

And the vehicle's
FMV on the first
day of the lease
exceeded:

.
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 information on apportionment
of taxes on real property between seller and purchaser.

Interest expense cannot be used to offset
interest income.

.
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.
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Line 13. Interest

.
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. See section 265(b) for special
rules and exceptions for financial institutions. Also see
section 265(b)(7) for a temporary de minimis exception
for financial institutions for certain tax exempt bonds
issued in 2009 and 2010.
.
For cash basis taxpayers, prepaid interest allocable
to years following the current tax year. For example, a
cash basis calendar year taxpayer who in 2012 prepaid
interest allocable to any period after 2012 can deduct
only the amount allocable to 2012.
.
Interest and carrying charges on straddles.
Generally, these amounts must be capitalized. See
section 263(g).
.
Special rules apply to:
.
Disqualified interest on certain indebtedness under
section 163(j). See Form 8926, Disqualified Corporate
Interest Expense Disallowed Under Section 163(j) and
Related Information, and the related instructions.
.
Interest on which no tax is imposed (see section
163(j)).
.
OID on certain high-yield discount obligations. See
section 163(e)(5) to determine the amount of the
deduction for OID that is deferred and the amount that
is disallowed on a high-yield discount obligation. The
rules under section 163(e)(5) do not apply to certain
high-yield discount obligations issued after August 31,
2008 and before January 1, 2011. See section 163(e)
(5)(F). Also, see Notice 2010-11, 2010-4 I.R.B. 326.

Monitor Green Sheet Notice disseminated by
JohnnyCervantes on 11/4/2009, which would extend
the allowable issue date through January 1,
2011.
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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.

.
Section 108(i) OID deduction. If the RIC issued a
debt instrument with OID that is subject to section 108(i)
(2) because of an election to defer income from the
cancellation of debt (COD), the deduction for this OID is
deferred until the COD is includible in income. The
accrued OID is allowed as a deduction ratably over the
5-year period the COD is includible in income. The
deduction is limited to the amount of COD subject to the
section 108(i) election. An annual information statement
(discussed earlier) is required if an election is made.
See section 108(i)(5)(D) regarding any deferred COD
deduction that is allowed as a deduction in the current
year because of an accelerated event.
See email of 10:54 AM, 1/6/2010, from W.E.
Blanchard to Clarence light with text for 108(i).

Line 14. Depreciation.

.
Include on line 14 depreciation and the cost of certain
property that the RIC elected to expense under section
179. See Form 4562 and the related instructions to
figure the amount of depreciation to enter on this line.

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Penalties or fines paid to any government
agency or instrumentality because of a
CAUTION
violation of a law are not deductible. See
Chapter 11, Other Expenses, in Publication 535 for
additional information.

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Line 22. Other Deductions

.
Attach a statement listing by type and amount all
allowable deductions that are not specifically deductible
elsewhere on Form 1120-RIC. 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.
.
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.
.
Deduction for certain energy efficient commercial
building property placed in service during the tax year.
See section 179D. Also, see Notice 2006-52, 2006-26
I.R.B. 1175, as amplified and clarified by Notice
2008-40, 2008-14 I.R.B. 725, and as modified by Notice
2012-26, 2012-17 I.R.B. 847.
Expires January 1, 2014.

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Any extraterritorial income exclusion (from Form
8873, line 52).
.
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
(the sum of Part I, line 26; Part ll, line 3; and Form 2438,
line 11) computed without regard to the following:
.
Any deduction for contributions.
.
The domestic production activities deduction.

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The deduction allowed under section 249, related 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.

.
Enter contributions to qualified pension, profit-sharing,
or other funded-deferred compensation plans.
Employers who maintain such a plan generally must file
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.
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.
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

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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. For tax years beginning after
August 1, 2012, see Regulations sections 1.274-9 and
1.274-10.
.
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.

Line 25a. Deductions for dividends paid.
.
Enter the amount from Schedule A, line 8a.

Line 25b. Section 851(d)(2) and Section 851(i)
deductions.

.
Enter the amount from Schedule J, line 2c.

.
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 Real Estate Investment
Trust (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. Refundable credit from Form 8827.

.
If the RIC elected to claim certain minimum tax credits
instead of any additional first-year special depreciation

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allowance for eligible property, see the instructions for
Form 8827. Enter on line 28h the amount from line 8c of
Form 8827, if applicable.

The RIC must use the refundable credits from
Form 8827 to reduce any built-in gains tax
CAUTION
derived from property that it owned when it was
a C corporation, before the credits can be used to
reduce RIC taxable income. See the instructions for line
h of the Built-in Gains Tax Worksheet Instructions later.

Line 28i. 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. Enter the amount withheld and the
words “Backup Withholding” in the blank space above
the line 28i.

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.

.
Part II — Tax on
Undistributed Net Capital
Gain Not Designated
Under Section 852(b)(3)
(D)
Line 1.

.
Enter the net capital gain from line 17 of Schedule D
(Form 1120).

.
Enter the capital gain dividends from Schedule A,
line 8b.

Line 4. Capital gains tax.

.
Multiply the amount on line 3 by 35% (.35). Enter the
result here and on Schedule J, line 2b.

.
Schedule A—Deduction
for Dividends Paid
Column (a)

.
is used to determine the deduction for dividends paid
resulting from income derived from ordinary dividends.

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Line 1.
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.
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
information on post-October currency or capital losses.

.
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.

.
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).

.
If the RIC elects under Section 853A to pass through
credits from qualified tax credit bonds to shareholders,
increase the dividends paid deduction by the amount of
the credits distributed to shareholders. To make the
election, see the instructions for Item 11, under
Schedule K—Other Information.

.
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.

.
In the case of a qualified “fund of funds” structure, a RIC
may pay exempt-interest dividends without regard to
the requirement that at least 50% of the value of the

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funds assets consist of tax-exempt obligations. See
section 852(g) for more information.
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.
Schedule J—Tax
Computation
.
Line 1
.
If the RIC is a member of a controlled group, check the
box on line 1 and complete and attach Schedule O
(Form 1120), Consent Plan and Apportionment
Schedule for a Controlled Group. See Schedule O
(Form 1120) 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 that are not members of a controlled
group, and do not file 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:
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.
$0
.
50,000
.
75,000
.
100,000
.
335,000
.
10,000,000
.
15,000,000
.
18,333,333

But not over—
$50,000
75,000
100,000
335,000
10,000,000
15,000,000
18,333,333
—

Tax is:
15%
$ 7,500 + 25%
13,750 + 34%
22,250 + 39%
113,900 + 34%
3,400,000 + 35%
5,150,000 + 38%
35%

Of the amount
over—
$0
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.

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.
Line 2b–Capital Gains Tax

.
Enter the capital gains tax from line 4, Part II.

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.
Line 2c—Taxes Imposed Under
Section 851(d)(2) and 851(i)
.
Check the appropriate box(es) and enter the tax(es)
imposed under the following relief provisions:
.
Section 851(d)(2) relating to failures to meet certain
requirements of the asset test of section 851(b)(3); and
.
Section 851(i) relating to failures to meet certain
requirements of the gross income test
.
See the instructions on page 2 for details on the
requirements of the gross income and asset tests. Also,
see sections 851(d)(2) and 851(i).
.
Attach a statement showing the computation of the
tax(es) and an explanation of why the RIC failed to meet
the requirement of the asset test or the gross income
test and a description of why such failure is due to
reasonable cause and not to willful neglect.

.
Line 2d–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 section 59(d)(1)(A).

.
Line 2e—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) (from Form 8621) in the
total for line 2e. On the dotted line to the left of line 2e
write “Section 1291” and the amount.
.
Do not include on line 2e any interest due under
section 1291(c)(3). Instead, if this applies, show the

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amount of interest owed in the bottom margin of page 1
and write “Section 1291 interest.”
.
See the Instructions for Form 8621.

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 2e. On
the dotted line to the left of line 2e, 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–Credit from Form 8834,
line 30

.
Enter any qualified electric vehicle passive activity
credits from prior years allowed for the current tax year
from Form 8834, Qualified Plug-In Electric and Electric
Vehicle Credit, line 30 and attach Form 8834 to this
return.

.
Line 3c–General Business Credit

.
The RIC is required to file Form 3800, General Business
Credit, to claim most business credits. For a list of
allowable credits, see Form 3800. Enter the allowable
credit from Part II, line 38, of Form 3800, on line 3c.
Also, see the applicable credit form and its instructions.

.
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.

Bond credits from Form 8912.

.
Enter the allowable credits from Form 8912, Credit to
Holders of Tax Credit Bonds, line 12. However, if the
RIC elects to pass through credits from tax credit bonds
to its shareholders, it cannot take the credit. See Item
11 under question 5 later for more information.

.
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

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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 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.

.
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 statement.
.
Recapture of qualified electric vehicle (QEV) 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.
.
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.
.
Recapture of new markets credit (see Form 8874 and
Regulations section 1.45D-1(e) for details).
.
Recapture of employer-provided childcare facilities
and services credit (see Form 8882 and section 45F(d)
for details).
.
Interest due on deferred gain recognition (section
1260(b)).

.
Built-in Gains Tax
.
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

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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 for tax years beginning in 2012 or
2013, the RIC must pay tax on the net recognized
built-in gain during the 5-year period beginning on its
first day as a RIC or the day it acquired the property.
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.
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, later). 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
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.

.
Built-in Gains Tax Worksheet
Instructions
.
Complete the worksheet below to figure the built-in
gains tax under Regulations section 1.337(d)-6 or
1.337(d)-7.

.
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.

.
Add the amounts shown on:
.
Form 1120-RIC, page 1, line 24,
.
Form 1120-RIC, 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 Built-in Gains Tax Worksheet
on the next page.

.
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.

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.
Enter on line c the RIC's net unrealized built-in gain
reduced by the net recognized built-in gain for prior
years. See sections 1374(c)(2) and (d)(1).

.
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.

.
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 RIC's taxable
income.

.
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 RIC's taxable income.

.
Note. If the RIC makes the election, the unused

research and minimum tax credits must first be used to
reduce the tax on net built-in gain for the tax year to the
greatest extent possible. Any remaining unused
research and minimum tax credits are included on
line 28h to reduce the RIC's income tax. For more
information, see the instructions for line 28h.
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d0e3250
d0e3253

.
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 in
Part I of Form 8949.
.
Long-term capital gain as a long-term capital loss in
Part II of Form 8949.

.
How to Report
.
If the RIC checked the “Other” box, enter the tax or
interest on line 6, Schedule J. Also, attach a statement,
showing the computation of each item included in the
total for line 6, and identify (a) the type of tax or interest,
and (b) the applicable Code section.

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Built-in Gains Tax Worksheet

(keep for your records)

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.
d.
.
e.
.
f.
.
g.
.
h.

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d0e3338
d0e3349

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 (see instructions) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .

Instructions for Form 1120-RIC Pg. 41

a.
b.
c.
d.
e.
f.
g.
h.
i.

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.
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 and How to report, below.
.
Subtract from the total for line 7 the deferred tax on
the RIC's share of the undistributed earnings of a
qualified electing fund (see Form 8621).

.
How to report
.
Attach a statement 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.

.
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.

.
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.
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Foreign person.

.
The term “foreign person” includes:
.
A foreign citizen or nonresident alien.

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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.

Tax-exempt interest.

.
Show any tax-exempt interest received or accrued.
Include any exempt-interest dividends received as a
shareholder in a mutual fund or other RIC.

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.

.
Note. In the case of a qualified “fund of funds”

structure, a RIC may elect to allow shareholders the
foreign tax credit without regard to the requirement that
more than 50% of the value of its assets consist of stock
or securities in foreign corporations. See section 852(g)
for more information.
.
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

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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.
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d0e3614
d0e3619

Reporting requirements.

.
To make a valid election under section 853, in addition
to timely filing Form 1120-RIC and checking the box for
Schedule K, item 10, the RIC must file a statement of
election, which includes the information listed under
Regulations section 1.853-4(c). The information must
be provided on or with a Form 1118, Foreign Tax Credit,
attached to the RIC's timely filed tax return.
.
For more information, see Regulations section
1.853-4.

.
Notification to shareholders. If the RIC makes

the election, it must furnish to its shareholders a written
notice designating the shareholder's portion of (1)
foreign taxes paid by the RIC to foreign countries and
possessions of the United States, and (2) the dividend
that represents income derived from:
.
sources within countries described in section 901(j),
and
.
other foreign-source income.
.
The notice must be mailed to the shareholders no
later than 60 days after the end of the RIC's tax year.
For more information, see Regulations section 1.853-3.

Election under section 853A.

.
A RIC can elect to pass through credits from tax credit
bonds to its shareholders. If the RIC makes the election,
include the interest income from the tax credit bonds on
Part I, line 2. Also, increase the dividends paid
deduction by the amount of the credits distributed to
shareholders. If the RIC makes the election, it is not
allowed to take any credits related to the qualified tax
credit bonds.
.
For more information, see section 853A.

.
Notification to shareholders. If the RIC makes

the election to apply section 853A, it must furnish to its
shareholders a written notice designating the
shareholder's proportionate share of: (1) credits from
tax credit bonds, and (2) gross income in respect of
such credits. The notice must be mailed to the
shareholders no later than 60 days after the end of the
RIC's tax year.
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.
Schedule L–Balance
Sheets per Books
.
The balance sheets should agree with the RIC's books
and records.

Instructions for Form 1120-RIC Pg. 44

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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.
.
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.
Paperwork Reduction Act Notice.

Instructions for Form 1120-RIC Pg. 45

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8:15 - 14-Mar-2013

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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.
.
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 . . . . . . . . . . . .
.
Learning about the law or the
form . . . . . . . . . . . . . . . . . . . .
.
Preparing the form . . . . . . . . .
.
Copying, assembling, and
sending the form to the IRS . .

54 hr.,16 min.
19 hr., 16 min.
36 hr., 49 min.
4 hr., 33 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:M:S; 1111
Constitution Ave., NW; IR-6526; Washington, DC
20224. Do not send the tax form to this office. Instead,
see Where to File, earlier.

Instructions for Form 1120-RIC Pg. 46

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File Modified 2013-04-23
File Created 2013-03-14

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