Final regulations: Revised examples illustrating controlled group rules for RICs

Examples illustrating controlled group rules for RICs

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.”

Related content

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:

  • Demonstrating compliance with the 25% tests
  • Applying the market value exception and the 30-day cure provision
  • Dealing with different quarter-end testing dates

Reasons for regulations

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.  

Today’s guidance

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:

  • Application of the proposed changes to a parent RIC investing in the stock of subsidiary RICs (a “fund of funds” structure)
  • Application of the proposed changes to a RIC’s indirect investment in qualified publicly traded partnerships, as defined in section 851(h)
  • Clarification of existing regulatory language implementing the controlled group rules of section 851(c)

Effective date

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.

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