Internal Revenue Service
Revenue Ruling
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smRev. Rul. 72-83
1972-1 C.B. 205
Sec. 851
IRS Headnote
A taxpayer must meet the diversification of investment requirements of section 851(b)(4)(B) of the Code at the end of the first quarter of the first taxable year for which an election is filed to be taxed as a regulated investment company.
Full Text
Rev. Rul. 72-83
Advice has been requested whether a taxpayer may elect to be taxed as a regulated investment company if it does not meet the diversification of investment requirements of section 851(b)(4)(B) of the Code, for the first taxable year for which an election was filed, under the circumstances set forth below.
The taxpayer was incorporated pursuant to applicable state law, on March 14, 1940, and has been registered with the United States Securities and Exchange Commission for many years as a management, closed-end, nondiversified investment company under the Investment Company Act of 1940. Prior to the taxpayer's fiscal year beginning on June 1, 1969, the taxpayer met all of the requirements of subchapter M (sections 851-855) of the Code so as to be considered as a regulated investment company for Federal income tax purposes, including the diversification of investment requirements set forth in section 851(b)(4)(B) of the Code. However, the taxpayer did not file an election to be taxed as a regulated investment company under subchapter M of the Code for any of such prior taxable years.
For the taxable year June 1, 1969 through May 31, 1970, the taxpayer filed an election for the first time to be taxed as a regulated investment company even though at the end of the first quarter of such taxable year, the value of the common stock holdings of the taxpayer in X company exceeded 25 percent of the value of the taxpayer's total assets, due solely to fluctuations in the market value of the common stock owned by the taxpayer. The question is whether the exception to the diversification of investment requirements of section 851(b)(4)(B) of the Code, set forth in section 851(d) of the Code (where discrepancy is not due to acquisition of additional property) is applicable to a taxpayer seeking to acquire status as a regulated investment company for the first taxable year for which it has filed an election, or, whether the exception is applicable only to a taxpayer who has previously acquired status as a regulated investment company under subchapter M of the Code.
Section 851(a)(1) of the Code provides, in part, that the term regulated investment company means any domestic corporation (other than a personal holding company) which at all times during the taxable year is registered under the Investment Company Act of 1940 as a management company.
Section 851(b)(1) of the Code provides, in part, that a corporation shall not be considered a "regulated investment company" for any taxable year unless--
(1) it files with its return for the taxable year an election to be a regulated investment company or has made such election for a previous taxable year which began after December 31, 1941;
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(4) at the close of each quarter of the taxable year--
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(B) not more than 25 percent of the value of its total assets is invested in the securities (other than Government securities or the securities of other regulated investment companies) of any one issuer, or of two or more issuers which the taxpayer controls * * *"
Section 851(d) of the Code provides, in applicable part, that a corporation which meets the requirements of subsection (b)(4) at the close of any quarter shall not lose its status as a regulated investment company because of a discrepancy during a subsequent quarter between the value of its various investments and such requirements unless such discrepancy exists immediately after the acquisition of any security or other property and is wholly or partly the result of such acquisition.
In the instant case, the taxpayer did not meet the diversification of investment requirements of section 851(b)(4)(B) of the Code at the end of the first quarter of the first taxable year for which an election to be taxed as a regulated investment company had been filed, although the taxpayer did meet such requirements in taxable years prior to filing such election. Section 851(d) of the Code allows an exception to such diversification of investment requirements if the discrepancy did not arise from the acquisition of any security or property, but such exception, under the specific provisions of section 851(d) of the Code, is applicable only to a corporation which has acquired status as a regulated investment company by meeting such investment requirements (as well as the other requirements of subchapter M of the Code) at the end of the first quarter of the first taxable year for which it has filed an election. Thus, section 851(d) of the Code expressly provides that a corporation "shall not lose its status as a regulated investment company" if it has previously met the diversification of investment requirements in any quarter.
Accordingly, it is held that the taxpayer, in the instant case, will not be taxable as a regulated investment company for the taxable year, June 1, 1969 through May 31, 1970, the first taxable year for which an election to be taxed as a regulated investment company was filed, since it did not meet the diversification of investment requirements of section 851(b)(4)(B) of the Code (without regard to section 851(d) of the Code) at the end of the first quarter of such taxable year.