The Treasury Department and IRS today released for publication in the Federal Register final regulations (T.D. 9737) that revise examples illustrating the controlled group rules related to regulated investment companies (RICs). These final regulations adopted rules that were proposed in August 2013, to resolve an issue concerning how the controlled group rules are to be applied in connection with the RIC “asset diversification” tests. The final regulations adopt the 2013 proposed regulations “with certain clarifications.”
In connection with the final regulations, the IRS issued an advance version of Rev. Proc. 2015-45 [PDF 93 KB] that describes conditions under which the IRS will treat an “upper RIC” that invests in one or more “lower RICs” as satisfying the 25% tests—i.e., the asset diversification requirements of section 851(b)(3)(B). Rev. Proc. 2015-45 also provides procedures intended to “lessen the burden” of:
The proposed regulations were issued to clarify whether a RIC and its controlled subsidiary are a controlled group if the subsidiary does not control (within the meaning of section 851(c)(2)) at least one other corporation. When the regulations were proposed in 2013, there were a series of examples in the then-applicable regulations that some practitioners interpreted to require the presence of two levels of controlled entities for a controlled group to exist. The proposed regulations stated that this interpretation was unwarranted.
Accordingly, the proposed regulations included proposals to clarify that if the requirements of section 851(c)(3) are met, a RIC and its controlled subsidiary are a controlled group even if the group consists only of that RIC and its subsidiary.
The final regulations [PDF 221 KB] clarify application of the controlled group rules of section 851(c). The preamble to the final regulations notes that comments were received on three general categories of issues and discusses these comments:
The date when the final regulations will apply refers to the date when they will be published in the Federal Register, scheduled for September 15, 2015.
The final regulations apply to quarters that begin on or after a date that is 90 days after September 15, 2015. Under section 851(d)(1), whether a taxpayer loses status as a RIC in one quarter may depend on whether the taxpayer satisfied section 851(b)(3) and (c) at the close of one or more prior quarters.
For purposes of applying the first sentence of section 851(d)(1) to a quarter that begins on or after a date that is 180 days after September 15, 2015, the final regulations apply in determining whether the taxpayer met the requirements of section 851(b)(3) and (c) at the close of prior quarters.
© 2017 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.
The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG's Federal Tax Legislative and Regulatory Services Group at: + 1 202 533 4366, 1801 K Street NW, Washington, DC 20006.