| Instructions for Form 1120-RIC |
2006 Tax Year |
This is archived information that pertains only to the 2006 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.
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.
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:
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Is registered throughout the tax year as a management company or unit investment trust under the Investment Company Act of
1940
(ICA),
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Has an election in effect under the ICA to be treated as a business development company, or
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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).
In addition, the RIC must meet the income test, the asset test, and the distribution requirements explained below.
The income test:
At least 90% of its gross income must be derived from the following items:
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Dividends,
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Interest (including tax-exempt interest income),
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Payments with respect to securities loans (as defined in section 512(a)(5)),
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Gains from the sale or other disposition of stock or securities (as defined in ICA section 2(a)(36)) or foreign currencies,
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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
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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.
The asset test:
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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.
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Cash and cash items (including receivables),
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Government securities,
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Securities of other RICs, and
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Securities of other issuers, except that the investment in a single issuer of securities may not exceed 5% of the value of
the RIC's assets
or 10% of the outstanding voting securities of the issuer (except as provided in section 851(e)).
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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:
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A single issuer (excluding government securities or securities of other RICs),
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Two or more issuers controlled by the RIC and engaged in the same or related trades or businesses, or
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One or more qualified publicly traded partnerships as defined in section 851(h).
See sections 851(b)(3) and 851(c) for further details.
Distribution requirements.
The RIC's deduction for dividends paid for the tax year (as defined in section 561, but without regard to capital
gain dividends) equals or exceeds
the sum of:
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90% of its investment company taxable income determined without regard to section 852(b)(2)(D); and
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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.
Earnings and profits.
The RIC must either have been a RIC for all tax years ending after November 7, 1983, or, at the end of the current
tax year, had no accumulated
earnings and profits from any non-RIC tax year.
Note.
For this purpose, current year distributions are treated as made from the earliest earnings and profits accumulated in any
non-RIC tax year. See
section 852(c)(3). Also see section 852(e) for procedures that may allow the RIC to avoid disqualification for the initial
year if the RIC did not
meet this requirement.
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.
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DHL Express (DHL): DHL Same Day Service, DHL Next Day 10:30 am, DHL Next Day 12:00 pm, DHL Next Day 3:00 pm, and DHL 2nd Day
Service.
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Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and
FedEx
International First.
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United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide
Express Plus,
and UPS Worldwide Express.
The private delivery service can tell you how to get written proof of the mailing date.
Private delivery services cannot deliver items to P.O. boxes. You must use the U.S. Postal Service to mail any item to an
IRS P.O. box address.
Extension of time to file
To request an extension of time to file, file Form 7004, Application for Automatic 6-Month Extension of Time To File Certain
Business Income Tax,
Information, and Other Returns, where you file your return. Generally, file Form 7004 by the regular due date of the return.
File the RIC's return at the applicable IRS address listed below.
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If the RIC's principal business, office, or agency is located in:
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And the total assets at the end of the tax year (Form 1120-RIC, page 1, item D) are:
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Use the following Internal Revenue Service Center address:
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Connecticut, Delaware, District of Columbia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New
Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, West
Virginia, Wisconsin
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Less than $10 million
$10 million or more
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Cincinnati, OH 45999-0012
Ogden, UT 84201-0012
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Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota,
Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, Texas,
Utah, Washington,
Wyoming
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Any amount
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Ogden, UT 84201-0012
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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.
The return must be signed and dated by:
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The president, vice president, treasurer, assistant treasurer, chief accounting officer or
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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, not the corporate
officer.
Note.
If this return is being filed for a series fund (as defined in section 851(g)(2)), the return may be signed by any officer
authorized to sign for
the RIC in which the fund is a series.
If an employee of the RIC completes Form 1120-RIC, the paid preparer's space should remain blank. A preparer who does not
charge the RIC to prepare
Form 1120-RIC should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill
in the “Paid Preparer's
Use Only” area.
The paid preparer must complete the required preparer information and:
Note.
A paid preparer may sign original or amended returns by rubber stamp, mechanical device, or computer software program.
Paid Preparer Authorization
If the RIC wants to allow the IRS to discuss its 2006 tax return with the paid preparer who signed the return, check the “Yes” box in the
signature area. This authorization applies only to the individual whose signature appears in the “Paid Preparer's Use Only” section of the RIC's
return. It does not apply to the firm, if any, shown in that section.
If the “Yes” box is checked, the RIC is authorizing the IRS to call the paid preparer to answer any questions that may arise during the
processing of its return. The RIC is also authorizing the paid preparer to:
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Give the IRS any information that is missing from the return,
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Call the IRS for information about the processing of the return or the status of any related refund or payment(s), and
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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 2007 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.
Other Forms That May Be Required
In addition to Form 1120-RIC, the RIC may have to file some of the following forms. Also see Pub. 542, Corporations, for an
expanded list of forms
the RIC may be required to file.
Form 1096,
Annual Summary and Transmittal of U.S. Information Returns. Use Form 1096 to transmit Forms 1099 and 5498 to the
Internal Revenue Service.
Form 1099-DIV,
Dividends and Distributions. Report certain dividends and distributions.
Form 1099-INT,
Interest Income. Report interest income.
Form 2438,
Undistributed Capital Gains Tax Return. If the RIC designates undistributed capital gains under section 852(b)(3)(D),
it must file this return and
pay tax on the gains designated by the 30th day after the end of the RIC's tax year. In addition, a copy of Form 2438 (with
Copy A of all Forms 2439)
must be attached to Form 1120-RIC when filed.
Form 2439,
Notice to Shareholder of Undistributed Long-Term Capital Gains. If the RIC filed Form 2438, it must complete Form
2439 for each shareholder for
whom it paid tax on undistributed capital gains and furnish a copy to the shareholder by the 60th day after the end of the
RIC's tax year.
Form 8613,
Return of Excise Tax on Undistributed Income of Regulated Investment Companies. If the RIC is liable for the 4% excise
tax on undistributed income
under section 4982 or makes an election under section 4982(e)(4), it must file this return for the calendar year.
Form 8886,
Reportable Transaction Disclosure Statement. File Form 8886 if the RIC or an investment vehicle that is at least 95%
owned by one or more RICs at
all time during the course of a transaction participated in a listed transaction. Listed transactions include transactions
that are the same as or
substantially similar to one of the types of transactions that the IRS has determined to be a tax avoidance transaction. These
transactions are
identified by notice, regulation, or other form of published guidance in the I.R.B. as a listed transaction.
See the instructions for Form 8886 for more details on the conditions that apply to determine if a RIC participated
in a listed transaction and
needs to file this form.
Reportable transactions by material advisors.
Until further guidance is issued, material advisors who provide material aid, assistance, or advice with respect to
any reportable transaction,
must use Form 8264, Application for Registration of a Tax Shelter, to disclose reportable transactions in accordance with
interim guidance provided in
Notice 2004-80, 2004-50 I.R.B. 963; Notice 2005-17, 2005-8 I.R.B. 606; and Notice 2005-22, 2005-12 I.R.B. 756.
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.
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
must meet the quarterly
net asset value (NAV) requirements under section 852(b)(5). To maintain the required NAV at the end of each quarter, the RIC
may take into account on
a monthly basis its distributive share of partnership items if the eligible partnership makes a proper election to close its
books at the end of each
month. See Rev. Proc. 2002-16 for details.
Eligibility.
A RIC is entitled to take into account its distributive share of partnership items on a monthly basis if:
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The RIC is entitled to hold itself out as a money market fund, or an equivalent of a money market fund.
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The RIC provides a statement to the partnership that it consents to the partnership's election to close its books monthly
and that the RIC
will include in its taxable income its distributive share of partnership items in a manner consistent with the election. See
Rev. Proc. 2002-16 for
the required contents of the statement of consent.
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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.
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The partnership is eligible under Rev. Proc. 2002-16 to make the monthly closing election and the election is effective by
the second month
after the month in which the RIC acquires the partnership interest.
Statement of consent.
The consent to a partnership's monthly closing election is effective for the month in which the RIC acquires the partnership
interest, unless the
RIC requests that the consent be effective for either of the two immediately following calendar months. In addition to timely
providing the
partnership with the statement of consent, the statement should be filed with Form 1120-RIC for the first tax year in which
the consent is effective.
The monthly closing consent (and the partnership's election) may be revoked only with the consent of the Commissioner. However,
the RIC's consent
becomes ineffective on any day when the RIC ceases to be an eligible partner and the partnership's monthly closing election
is terminated as of the
first day of any month the partnership is no longer eligible for the election under Rev. Proc. 2002-16. For more details,
see the Revenue Procedure.
To ensure that the RIC's tax return is correctly processed, attach all schedules and other forms after page 4, Form 1120-RIC,
in the following
order.
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Schedule N (Form 1120).
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Schedule O (Form 1120).
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Form 4626.
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Form 4136.
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Additional schedules in alphabetical order.
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Additional forms in numerical order.
Complete every applicable entry space on Form 1120-RIC. Do not enter “See attached” instead of completing the entry spaces. If more space is
needed on the forms or schedules, attach separate sheets using the same size and format as the printed forms. If there are
supporting statements and
attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on
the printed forms. Enter
the RIC's name and EIN on each supporting statement or attachment.
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.
Permissible methods include:
Generally, a RIC must use the accrual method of accounting if its average annual gross receipts exceed $5 million. For more
details, see section
448(c).
Mark-to-market accounting method
Generally, dealers in securities must use the mark-to-market accounting method described in section 475. Under this method,
any security that is
inventory to the dealer must be held at its fair market value (FMV).
Any security held by a dealer that is not inventory and held at the close of the tax year is treated as sold at its FMV on
the last business day of
the tax year. Any resulting gain or loss must be taken into account that year in determining gross income. The gain or loss
taken into account is
generally treated as ordinary gain or loss.
For details, including exceptions, see section 475, the related regulations, and Rev. Rul. 94-7, 1994-1 C.B. 151.
Dealers in commodities and traders in securities and commodities may elect, with some exceptions, to use the mark-to-market
accounting method. To
make the election, the RIC must file a statement describing the election, the first tax year the election is to be effective,
and in the case of an
election for traders in securities or commodities, the trade or business for which the election is made. Except for new taxpayers,
the statement must
be filed by the due date (not including extensions) of the income tax return for the tax year immediately preceding the election
year and attached to
that return, or if applicable, to a request for an extension of time to file that return. For more details, see Rev. Proc.
99-17, 1999-1 C.B. 503, and
sections 475(e) and (f).
Change in accounting method
To change its method of accounting, the RIC must file Form 3115, Application for Change in Accounting Method. For more information,
see Form 3115.
A RIC must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a RIC uses to
keep its records and
report its income and expenses. RICs can use a calendar year or a fiscal year.
For more information about accounting periods, see Regulations sections 1.441-1 and 1.441-2.
Generally, a RIC must get the consent of 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 getting the consent.
For more information on change of tax year, see Form 1128 and Regulations section 1.442-1.
Rounding Off to Whole Dollars
A RIC may round off cents to whole dollars on its return and schedules. If the RIC does round to whole dollars, it must round
all amounts. To
round, drop amounts under 50 cents and increase amounts from 50 cents to 99 cents to the next dollar (for example, $1.39 becomes
$1 and $2.50 becomes
$3).
If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round
off only the total.
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.
Depository Methods of Tax Payment
A 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. The two methods
of depositing
corporate income taxes are discussed below.
Electronic Deposit Requirement
The RIC must make electronic deposits of all depository taxes (such as employment tax, excise tax, and corporate income tax)
using the Electronic
Federal Tax Payment System (EFTPS) in 2007 if:
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The total deposits of such taxes in 2005 were more than $200,000 or
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The RIC was required to use EFTPS in 2006.
If the RIC is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the RIC is not required to
use EFTPS, it may
participate voluntarily.
To enroll in or get more information about EFTPS, call 1-800-555-4477 or visit
www.eftps.gov.
Depositing on time.
For EFTPS deposits to be made timely, the RIC must initiate the transaction at least one business day before the date
the deposit is due.
If the RIC does not use EFTPS, deposit RIC income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit
Coupon. 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 or visiting
an IRS taxpayer
assistance area. Be sure to have your EIN ready when you call.
Do not send deposits directly to an IRS office; otherwise, the RIC may have to pay a penalty. Mail or deliver the completed
Form 8109 with the
payment to an authorized depositary (such as a commercial bank or other financial institution authorized to accept federal
tax deposits). Make checks
or money orders payable to the depositary.
If the RIC prefers, it may mail the coupon and payment to Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030,
St. Louis, MO 63197.
Make the check or money order payable to “Financial Agent.”
To help ensure proper crediting, enter the RIC's EIN, the tax period to which the deposit applies, and “Form 1120-RIC” on the check or money
order. Darken the “1120” box under “Type of Tax” and the appropriate “Quarter” box under “Tax Period” on the coupon. Records of
these deposits will be sent to the IRS.
For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Pub. 583, Starting a Business
and Keeping Records.
If the RIC owes tax when it files Form 1120-RIC, do not include the payment with the tax return. Instead, mail or deliver
the payment with Form
8109 to an authorized depositary or use EFTPS, if applicable.
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.
If the RIC must pay estimated taxes, see Form 1120-W, Estimated Tax for Corporations.
Interest.
Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on
penalties imposed for failure
to file, negligence, fraud, substantial valuation misstatements, substantial understatements of tax, and reportable transaction
understatements from
the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section
6621.
Late filing of return.
A RIC that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax
for each month or part of a
month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days
late is the smaller of the
tax due or $100. The penalty will not be imposed if the RIC can show that the failure to file on time was due to reasonable
cause. Attach a statement
explaining the reasonable cause.
Late payment of tax.
A RIC that does not pay the tax when due generally may be penalized ½ of 1% of the unpaid tax for each month or part
of a month the
tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the RIC can show that the failure
to pay on time was due
to reasonable cause.
Trust fund recovery penalty.
This penalty may apply if certain 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, or Form 945, Annual Return of Withheld Federal Income Tax. The trust fund recovery penalty may be imposed on all
persons who are
determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted
willfully in not doing so.
The penalty is equal to the unpaid trust fund tax. See the Instructions for Form 720, or Pub. 15 (Circular E), Employer's
Tax Guide, for details,
including the definition of responsible persons.
Other penalties.
Other penalties can be imposed for negligence, substantial understatement of tax, reportable transaction understatements,
and fraud. See sections
6662, 6662A and 6663.
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