House and Senate Pass RIC Modernization Act of 2010; Bill Clears for President’s Signature

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Congress has just passed H.R. 4337, the Regulated Investment Company Modernization Act of 2010 (the “Act”), which modernizes various U.S. federal income and excise tax rules relating to registered investment companies that are regulated investment companies (“RICs”) under Subchapter M of the Internal Revenue Code (the “Code”), whether open-end (“mutual funds”) or closed-end. The Act clarifies the current tax laws affecting RICs, modifies or eliminates various special tax rules applicable to RICs that have become obsolete, and reduces the administrative burdens imposed on RICs and the adverse effects of certain technical tax rules on RICs and their shares.

The Act incorporates many substantive proposals included in the original bill as introduced in December 2009 (for Ropes & Gray’s alert on the original bill, click here). Notably, the Act does not contain a significant provision included in the original bill that would have treated a RIC’s gains from all commodities, rather than only from foreign currencies, as “qualifying income” for purposes of a RIC’s gross income test. This provision would have enabled RICs to invest without limitation in precious metals and other commodities, including through futures, swaps, and other derivative contracts. Gains from foreign currency will continue to constitute “qualifying income” unless and until Treasury exercises the regulatory authority it was granted in 1986 to exclude certain foreign currency gains from qualifying income. We have been actively involved in efforts to enact these reforms, and expect efforts to extend good income treatment to all commodities gains to continue next year.

The following summarizes some of the Act’s more significant provisions. Please note that the effective dates of the Act’s provisions vary. As indicated below, many of the provisions will be effective for a RIC’s taxable year beginning after the date of the Act’s enactment, but certain provisions offering relief to RICs will be effective for taxable years for which the returns are not yet due.

Please see full article below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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