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IRS issues Revenue Ruling 2012-29 Clarifying the Effective Date of Capital Loss Carryforwards for Excise Tax Purposes

Overview

The Internal Revenue Service ("IRS") recently issued Revenue Ruling 2012-29 (the "Ruling"), which provided guidance regarding the effective date of the capital loss carryforward provisions contained in section 101(c) of the RIC Modernization Act of 2010 (the "Act"), for purposes of the excise tax rules under section 4982.1 The Ruling holds that the Act's amendments to the loss carryforward rules in section 1212(a) apply beginning with any net capital loss recognized in the period that determines a RIC's required distribution for calendar year 2011. Accordingly, to the extent that the capital gains and losses recognized for the November 1, 2010 to October 31, 2011 period result in a net capital loss, the net capital loss is carried forward indefinitely for excise tax purposes.

Background

Prior to the Act, section 1212(a) provided that a net capital loss for a regulated investment company ("RIC") carried forward as a short-term capital loss, and expired after eight years if not offset by capital gains during that eight year period. Section 101(c) of the Act amended section 1212(a) to allow a RIC to treat a net capital loss occurred in taxable years beginning after the date of enactment of the Act (December 22, 2010) as arising on the first day of the next taxable year, the effect of which is that a post-Act net capital loss of a RIC carries forward without expiration. Additionally, the Act provided that capital losses retain their original character when carrying forward.

Because the effective date contained in the amendment did not reference the excise tax rules, there was uncertainty surrounding how the effective date applied for excise tax purposes. Several of the alternatives being considered included an October 31, 2012 effective date, a bifurcated approach based upon the fiscal year-end of the fund, and an October 2011 effective date (the approach now sanctioned by the Ruling). The timing of the issuance of this guidance from the IRS prior to the 2012 excise tax season was necessary to enable RICs to accurately determine their amount of distributable capital gains for 2012, as they would need to know the character of capital losses carried forward from the 2011 excise tax year.

Holding

The IRS ruled in Rev. Rul. 2012-29 that, for purposes of the excise tax rules, the Act's amendments to the loss carryover rules in section 1212(a) apply beginning with any net capital loss recognized in the period that determines a RIC's required distribution for calendar year 2011. Accordingly, the amendments apply to net capital losses recognized during the one year period that begins on November 1, 2010 (absent an election under section 4982(e)(4).

Thus, this allows a net capital loss generated during the period November 1, 2010 to October 31, 2011 to be treated as arising on the first day of the next year (in this case, November 1, 2011) and can be carried forward indefinitely, in the same character that the loss was realized.

Click here to view Revenue Ruling 2012-29.

For additional information or questions, please contact any of the following Deloitte professionals:

Eric Byrnes
Tax Director
Deloitte Tax LLP
+1 973 602 6710

Rich Gelfand
Tax Senior Manager
Deloitte Tax LLP
+1 617 437 2504

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