Rev. Rul. 69-134

Advice has been requested with respect to the proper application of sections 851(b)(4) and (d) of the Internal Revenue Code of 1954, relating to the diversification of investments requirements of a regulated investment company, under the circumstances described below.

A domestic corporation has qualified as and elected to be taxed as a regulated investment company under sections 851 through 855 of the Code in each of its taxable years since its incorporation. During the first quarter of one of its taxable years, the investment company acquired additional securities of a corporation in which it previously had less than 5 percent of the value of its total assets invested. Immediately after the acquisition, it had more than 5 percent of the value of its total assets invested in such corporation and more than 50 percent of the value of its total assets invested in various corporations, which in each case exceeded 5 percent of the value of its total assets. However, in no case did the investment company hold more than 10 percent of the outstanding voting securities of any of such corporations. This situation remained unchanged at the close of the quarter.

Section 851(b)(4)(A) of the Code provides that a corporation shall not be considered a regulated investment company for any taxable year unless at the close of each quarter of the taxable year at least 50 percent of the value of its total assets is represented by cash and cash items, Government securities, securities of other regulated investment companies, and other securities for purposes of this calculation limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the taxpayer and to not more than 10 percent of the outstanding voting securities of such issuer.

Section 851(d) of the Code states in part that a corporation which does not meet the requirements of section 851(b)(4) of the Code at the close of any quarter by reason of a discrepancy (between the value of its various investments and such requirements) existing immediately after the acquisition of any security or other property which is wholly or partly the result of such acquisition during such quarter shall not lose its status for such quarter as a regulated investment company if such discrepancy is eliminated within 30 days after the close of such quarter.

The specific questions in the instant case are (a) whether the investment company is required to dispose of securities of the issuer that created the discrepancy or whether the disposition of sufficient securities of any issuer in which it had more than 5 percent of its assets invested will eliminate the discrepancy, and (b) the values to be used in making the computation.

The general design of the diversification of investments requirements of regulated investment companies is that each quarter of a taxable year be considered separately. Therefore, any action that could have been taken prior to the close of the quarter may be taken within the subsequent 30-day period.

Accordingly, if within the 30-days prescribed in section 851(d) of the Code, the investment company disposes of sufficient securities of any issuer or issuers in which it had more than 5 percent of its assets invested, which would have eliminated the discrepancy had such securities been disposed of prior to the close of the quarter, such discrepancy will have been considered eliminated. For purposes of this computation, the value of the securities disposed of shall be the value on the last business day of the quarter.