Rev. Rul. 80-50

1980-1 C.B. 146, 1980-8 I.R.B. 14.

                       Internal Revenue Service
                                 Revenue Ruling

      REGULATED INVESTMENT COMPANY OR REAL ESTATE INVESTMENT TRUST; SHORT
                             TAXABLE YEAR; QUARTERS

                          Published: February 25, 1980

Section 851.--Definition of Regulated Investment Company, 26 CFR 1.851-2: Limitations

(Also Section 856; 1.856-2.)

  Regulated investment company or real estate investment trust; short taxable year; quarters. In the case of short taxable year, the phrase "at the close of each quarter of the taxable year" in sections 851(b)(4) and 856(c)(5) of the Code refers to quarterly periods that end, to the extent possible, on the same3 dates as the quarters of a 12-month year, even though the use of 3-month quarters may result in one quarter of less than three months.

ISSUE

  In the case of an 8 month taxable year, does the phrase 'at the close of each quarter of the taxable year' in section 851(b)(4) of the Internal Revenue Code refer to 3 or 4 quarters and when do the quarters end?

FACTS

  Corporation A, which currently has a taxable year ending April 30, received permission to change its accounting period to the calendar year. This change will require a return for the short taxable year beginning May 1, 1979 and ending December 31, 1979.  It is A's intent to qualify and elect to be treated as a regulated investment company under subchapter M (sections 851-855) of the Code for the short taxable year and for future taxable years.  A did not qualify as a regulated investment company for any prior taxable period.

LAW AND ANALYSIS

  Section 851(b)(4)(A) of the Code states the general rule that at the close of each quarter of the taxable year at least 50 percent of the value of a regulated investment company's total assets must be represented by cash and cash items, Government securities, securities of other regulated investment companies and other securities limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the investment company's total assets and to not more than 10 percent of such issuer's outstanding voting securities.

  Section 851(b)(4)(B) of the Code imposes additional quarterly limitations on concentrating investments.  Section 851(d) provides that a regulated investment company has 30 days after the end of a quarter to eliminate any discrepancy between the requirements of section 851(b)(4) and the value of its various investments that existed at the end of the quarter.

  A mere change of accounting period should not result in A's being subjected to more stringent diversification testing.  A stricter testing would occur if the 8-month year were divided into 4 quarters that are each 2 months long.  The diversification testing would be done at shorter intervals than usual and some financial statement preparation dates would be dates as of which financial statements are not usually prepared.

  In the case of a 12-month year, diversification testing of regulated investment companies is done at the end of each quarter of the year, usually a 3-month period.  The 3-month testing scheme can best be adapted to a taxpayer's short year by having such quarters end, to the extent possible, on the same dates as a 12-month year. Although the use of 3-month quarters may result in 1 quarter of less than 3 months in the short year, it would be less disruptive of the diversification testing than simply dividing a short year into 4 equal parts and it would still satisfy the objective of the testing requirement.

HOLDING

  The short taxable year beginning May 1, 1979 and ending on December 31, 1979, will have three quarterly periods ending on June 30 (2 months long), September 30 (3 months long), and December 31 (3 months long).  The holding in this revenue ruling is also applicable to real estate investment trusts in applying section 856(c)(5) of the Code.

Rev. Rul. 80-50, 1980-1 C.B. 146, 1980-8 I.R.B. 14.