Statements

Stock ownership in foreign corporations.   Attach the statement required by section 551(c) if:

• The fund owned 5% or more in value of the outstanding stock of a foreign personal holding company and
• The fund was required to include in its gross income any undistributed foreign personal holding company income from a foreign personal holding company.

Transfers to a corporation controlled by the transferor.   If the fund receives stock of a corporation in exchange for property, and no gain or loss is recognized under section 351, the fund (transferor) and the transferee must each attach to their tax returns the information required by Regulations section 1.351-3.

Safe harbor under Temporary Regulations section 1.67-2T(j)(2).   Generally, shareholders in a nonpublicly offered fund that are individuals or pass-through entities are treated as having received a dividend in an amount equal to the shareholder's allocable share of affected RIC expenses for the calendar year. They are also treated as having paid or incurred an expense described in section 212 (and subject to the 2% limitation on miscellaneous itemized deductions) in the same amount for the calendar year.

Election.   A nonpublicly offered fund may elect to treat its affected RIC expenses for a calendar year as equal to 40% of the amount determined under Temporary Regulations section 1.67-2T(j)(1)(i) for that calendar year.

To make this election, attach to Form 1120-RIC for the tax year that includes the last day of the calendar year for which the fund makes the election, a statement that it is making an election under Temporary Regulations section 1.67-2T(j)(2). Once made, the election remains in effect for all subsequent calendar years and may not be revoked without IRS consent. See Temporary Regulations section 1.67-2T for definitions and other details.

Notice to shareholders.   A fund 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.

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 its shareholders. To qualify for payment of exempt-interest dividends, a fund must meet the quarterly net asset value requirements under section 852(b)(5). To maintain the required net asset value at the end of each quarter, the fund may take into account on a monthly basis its distributive share of partnership items if the eligible partnership makes a proper election to close its books at the end of each month. See Rev. Proc. 2002-16, 2002-9 IRB 572 for details.

Eligibility.   A fund is entitled to take into account its distributive share of partnership items on a monthly basis if:

• The fund is entitled to hold itself out as a money market fund, or an equivalent of a money market fund.
• The fund provides a statement to the partnership that it consents to the partnership's election to close its books monthly and that the fund will include in its taxable income its distributive share of partnership items in a manner consistent with the election. See Rev. Proc. 2002-16 for the required contents of the statement of consent.
• The fund 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 fund acquires the partnership interest.
• The partnership is eligible under Rev. Proc. 2002-16 to make the monthly closing election and the election is effective by the second month after the month in which the fund acquires the partnership interest.

Statement of consent.   The consent to a partnership's monthly closing election is effective for the month in which the fund acquires the partnership interest, unless the fund 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 the fund's 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 fund's consent becomes ineffective on any day when the fund ceases to be an eligible partner and the partnership's monthly closing election is terminated as of the first day of any month the partnership is no longer eligible for the election under Rev. Proc. 2002-16. Also see Rev. Proc. 2002-16 for transition rules concerning eligibility and effective dates for consents that are requested to become effective during 2002.

Assembling the Return

To ensure that the fund's tax return is correctly processed, attach all schedules and other forms after page 4, Form 1120-RIC, and in the following order.

1. Schedule N (Form 1120).
2. Form 4136 and Form 4626.
3. Additional schedules in alphabetical order.
4. Additional forms in numerical order.

Complete every applicable entry space on Form 1120-RIC. Do not write 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. Also, be sure to enter the fund's name and EIN on each supporting statement or attachment.

Accounting Methods

An accounting method is a set of rules used to determine when and how income and expenses are reported.

Figure taxable income using the method of accounting regularly used in keeping the fund's books and records. Generally, permissible methods include:

• Cash,
• Accrual, or
• Any other method authorized by the Internal Revenue Code.

In all cases, the method used must clearly show taxable income. If inventories are required, the accrual method must be used for sales and purchases of merchandise.

Accrual method.   Generally, a fund 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:

• All the events have occurred that fix the right to receive the income which is the earliest of the date (a) the required performance takes place, (b) payment is due, or (c) payment is received and
• The amount can be determined with reasonable accuracy.

See Regulations section 1.451-1(a) for details.

Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when:

• All events that determine the liability have occurred,
• The amount of the liability can be figured with reasonable accuracy, and
• Economic performance takes place with respect to the expense.

There are exceptions to the economic performance rule for certain items, including recurring expenses. See section 461(h) and the related regulations for determining when economic performance takes place.

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 included in inventory at its fair market value (FMV). Any security held by a dealer that is not inventory and that is 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 gain or loss must be taken into account in determining gross income. The gain or loss taken into account is generally treated as ordinary gain or loss.

For details, including exceptions, see section 475, the related regulations, and Rev. Rul. 94-7, 1994-1 C.B. 151.

Dealers in commodities and traders in securities and commodities may elect to use the mark-to-market accounting method. To make the election, the fund must file a statement describing the election, the first tax year the election is to be effective, and in the case of an election for traders in securities or commodities, the trade or business for which the election is made. Except for new taxpayers, the statement must be filed by the due date (not including extensions) of the income tax return for the tax year immediately preceding the election year and attached to that return, or if applicable, to a request for an extension of time to file that return. For more details, see Rev. Proc. 99-17, 1999-1 C.B. 503, and sections 475(e) and (f).

Change in accounting method.   Generally, the fund must get IRS consent to change the method of accounting used to report taxable income (for income as a whole or for any material item). To do so, it must file Form 3115, Application for Change in Accounting Method. For more information, see Pub. 538, Accounting Periods and Methods. However, there are new procedures under which a fund may obtain automatic consent to certain changes in accounting method. See Rev. Proc. 2002-9, 2002-3 I.R.B. 327 as modified by Rev. Proc. 2002-19, 2002-13 I.R.B. 696 and Rev. Proc. 2002-54, 2002-35 I.R.B. 432.

Section 481(a) adjustment.   The fund may have to make an adjustment to prevent amounts of income or expenses from being duplicated. This is called a section 481(a) adjustment. The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. However, a fund may elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. The fund must complete the appropriate lines of Form 3115 to make the election. For more details on the section 481(a) adjustment, see Rev. Proc. 2002-19 as amplified and clarified by Rev. Proc. 2002-54.

Include any net positive section 481(a) adjustment on Form 1120-RIC, line 7. If the net section 481(a) adjustment is negative, report it on Form 1120-RIC, line 22.

Accounting Periods

A fund must figure its taxable income on the basis of a tax year. The tax year is the annual accounting period the fund uses to keep its records and report its income and expenses. Funds can use a calendar year or a fiscal year.

For more information about accounting periods, see Regulations section 1.441-1, 1.441-2, and Pub. 538.

Calendar year.   If the calendar year is adopted as the annual accounting period, the fund must maintain its books and records and report its income and expenses for the period from January 1 through December 31 of each year.

Fiscal year.   A fiscal year is 12 consecutive months ending on the last day of any month except December. A 52-53 week year is a fiscal year that varies from 52 to 53 weeks.

Adoption of tax year.   A fund adopts a tax year when it files its first income tax return. It must adopt a tax year by the due date (not including extensions) of its first income tax return.

Change in tax year.   Generally, a fund must get the consent of the IRS before changing its tax year by filing Form 1128, Application To Adopt, Change, or Retain a Tax Year. However, under certain conditions, a fund may change its tax year without getting the consent.

For more information on change in tax year, see Form 1128, Rev. Proc. 2002-37, 2002-22 I.R.B. 1030, and Rev. Proc. 2002-39, 2002-22 I.R.B. 1046, and Pub. 538.

Rounding Off to Whole Dollars

The fund may show amounts on the return and accompanying schedules as whole dollars. To do so, drop amounts less than 50 cents and increase amounts from 50 cents through 99 cents to the next higher dollar.

Recordkeeping

Keep the fund'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 fund's basis in property for as long as they are needed to figure the basis of the original or replacement property.

The fund should keep copies of all filed returns. They help in preparing future and amended returns.

Depository Method of Tax Payment

The fund must pay the tax due in full no later than the 15th day of the 3rd month after the end of the tax year. The two methods of depositing income taxes, including capital gains tax, are discussed below.

Electronic Deposit Requirement

The fund must make electronic deposits of all depository taxes (such as employment tax, excise tax, and income tax) using the Electronic Federal Tax Payment System (EFTPS) in 2003 if:

• The total deposits of such taxes in 2001 were more than $200,000 or
• The fund was required to use EFTPS in 2002.

Depositing on time.   If the fund is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the fund is not required to use EFTPS, it may participate voluntarily. To enroll in or get more information about EFTPS, call 1-800-555-4477 or 1-800-945-8400. To enroll online, visit www.eftps.gov.

For EFTPS deposits to be made timely, the fund must initiate the transaction at least one business day before the date the deposit is due.

Deposits With Form 8109

If the fund does not use EFTPS, deposit fund income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon Book. If you do not have a preprinted Form 8109, use Form 8109-B to make deposits. You can get this form by calling 1-800-829-4933. Be sure to have your EIN ready when you call.

Do not send deposits directly to an IRS office; otherwise, the fund may have to pay a penalty. Mail or deliver the completed Form 8109 with the payment to an authorized depositary, i.e., a commercial bank or other financial institution authorized to accept Federal tax deposits. Make checks or money orders payable to the depositary.

If the fund prefers, it may mail the coupon and payment to Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Make the check or money order payable to Financial Agent.

To help ensure proper crediting, write the fund's EIN, the tax period to which the deposit applies, and Form 1120-RIC on the check or money order. Be sure to darken the 1120 box on the coupon. Records of these deposits will be sent to the IRS.

For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Pub. 583, Starting a Business and Keeping Records.

If the fund owes tax when it files Form 1120-RIC, do not include the payment with the tax return. Instead, mail or deliver the payment with Form 8109 to an authorized depositary or use EFTPS, if applicable.

Estimated Tax Payments

Generally, the following rules apply to the fund's payments of estimated tax.

• The fund must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more. For estimated tax purposes, the estimated tax of the fund is defined as its alternative minimum tax less the credit for Federal tax on fuels.
• The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.
• Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax.
• If the fund does not use EFTPS, use the deposit coupons (Forms 8109) to make deposits of estimated tax.

For more information on estimated tax payments, including penalties that apply if the fund fails to make required payments, see the instructions for line 29 on page 9.

Overpaid estimated tax.   If the fund overpaid 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 expected income tax liability and at least $500. To apply for a quick refund, file Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the fund files its income tax return. Do not file Form 4466 before the end of the fund's tax year.

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