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IRS Proposes Changes to RIC Asset Diversification Testing Regulation Examples (Reg §1.851–5) Related to Controlled Groups


On August 1, 2013, the Internal Revenue Service ("IRS") issued proposed Regs §1.851–5, which are intended to clarify how the controlled group rules apply for purposes of the Regulated Investment Company ("RIC") asset diversification test under §851(b)(3)(B). The controlled group rules are found in §851(c), and are designed to prevent a RIC from exceeding issuer limitations provided for in §851(b)(3)(B) by investing indirectly through a corporation controlled by the RIC, control being defined as ownership of 20 percent or more of the total combined voting power of all classes of stock entitled to vote.

Summary of the changes

The proposed changes revise the language of two examples provided within Reg §1.851–5 and add one new example. The changes would also update dates used in the examples and update Internal Revenue Code references. The purpose of these revisions is to clarify the application of the asset diversification rules as they relate to controlled groups and to prevent interpretations of the current examples that the IRS and Treasury Department believe are unwarranted.

Of particular note, RICs that invest in master limited partnerships, ETFs, or other investments organized as qualified publicly traded partnerships ("QPTPs") directly and through a controlled subsidiary may reconsider how they gain exposure to those markets in light of these revisions.

Example 1 is revised to clarify that two corporations (including a RIC and its subsidiary) can constitute a controlled group if the requirements under §851(c)(3) are met. This clarification is designed to prevent the interpretation that two levels of controlled entities are required for the controlled group rules to apply.

Example 4 is revised to clarify that the holdings of a subsidiary are aggregated with the holdings of the parent even if the subsidiary does not have a controlling interest in those holdings.

Example 7 is new, and is designed to clarify how the controlled group rules apply to wholly owned subsidiaries of RICs and how the rules under §851(b)(3)(B)(iii) apply to interests in QPTPs, as defined in §851(h). Specifically, this example clarifies that a RIC owning 20 percent or more of the voting power of another corporation that invests in QPTPs must include the pro-rata portion of that controlled group's QPTPs for purposes of determining the RICs total investment in QPTPs under §851(b)(3)(B)(iii).

Next steps

The IRS has scheduled a public hearing for December 9, 2013 at 10:00am. The deadline for written or electronic comments and requests to speak at the hearing is October 31, 2013.

Please see the Federal Register, Vol. 78, No. 149 for a full text of the preamble and proposed regulations examples.

Contact information

For additional information or questions, please contact:

Eric Byrnes
National Tax Managing Director, Regulated Investment Companies
Deloitte Tax LLP
+1 973 602 6710
  Ted Dougherty
National Managing Partner, Asset Management Tax
Deloitte Tax LLP
+1 212 436 2165


This alert contains general information only and Deloitte is not, by means of this alert, rendering accounting, business, financial, investment, legal, tax, or other professional advice or services. This alert is not a substitute for such professional advice or services, nor should it be used as a basis for any decision or action that may affect your business. Before making any decision or taking any action that may affect your business, you should consult a qualified professional advisor. Deloitte shall not be responsible for any loss sustained by any person who relies on this alert.


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