CORPORATION MUST HOLD RIC STOCK FOR REQUIRED PERIOD TO BE ELIGIBLE FOR DIVIDENDS-RECEIVED DEDUCTION.

Rev. Rul. 91-68

ISSUE

Must a shareholder of a regulated investment company (RIC) satisfy the holding period requirement of section 246(c)(1)(A) of the Internal Revenue Code to be entitled to a dividends-received deduction for dividends paid by the RIC?

FACTS

X qualifies as a RIC within the meaning of section 851 of the Code.

Y, a domestic corporation that held shares of X stock, received a distribution from X. Y did not meet the holding period requirement of section 246(c)(1)(A) of the Code with respect to the shares of X stock. Under section 854(b)(1)(A), X properly designated the entire distribution as a dividend for purposes of section 243.

LAW AND ANALYSIS

Section 243(a) of the Code allows a corporate shareholder a deduction (in an amount equal to certain specified percentages) for dividends received from a domestic corporation.

Under section 246(c)(1)(A) of the Code, no deduction is allowed under section 243 with respect to stock that is held by the taxpayer for 45 days or less.

For purposes of section 243(a) of the Code, section 243(d)(2) provides that a dividend received from a RIC is subject to the limitations in section 854.

Under section 854(a) of the Code, a capital gain dividend received from a RIC is not considered a dividend for purposes of section 243.

Under section 854(b) of the Code, provided a RIC meets the requirements of section 852(a) for the taxable year in which it pays a dividend, a shareholder in the RIC takes into account in computing any deduction under section 243 the portion of the dividend (other than a capital gain dividend) received from the RIC that is designated by the RIC as a dividend for purposes of section 243. The portion so designated is treated as received from a corporation that is not a 20-percent owned corporation.

The aggregate amount that may be designated by the RIC as a dividend for purposes of section 243 may not exceed the aggregate dividends received by the RIC for the taxable year. A dividend received by the RIC is treated as a dividend for this purpose only if the RIC would have been allowed a deduction under section 243 with respect to the dividend, determined as if section 243 applied to the RIC and after the application of section 246 (without regard to section 246(b)) and section 246A.

The holding period requirement in section 246(c)(1)(A) of the Code is intended to prevent corporations from enjoying a dividends- received deduction if they purchase stock shortly before an ex- dividend date and sell the stock shortly after the dividend is paid. Other factors being equal, the purchase price of the stock will exceed the sales price by approximately the amount of the dividend. Thus, absent the holding period requirement, the corporation would receive dividend income that is offset by both a dividends-received deduction and a loss on the sale of the stock approximately equal to the amount of the dividend. S. Rep. No. 1983, 85th Cong., 2d Sess. 38 (1958), 1958-3 C.B. 949.

There is no exception to section 246(c)(1)(A) of the Code for dividends received from a RIC. Thus, a RIC shareholder must hold RIC shares for the required period of time. The fact that X satisfied the holding-period requirement of section 246(c)(1)(A) with respect to the corporate stock it owned is necessary but not sufficient for X's shareholders to be eligible for the dividends-received deduction. If a corporate shareholder were not required to hold the RIC shares for the prescribed period, the holder could receive both the dividends- received deduction and a loss on the sale.

Because Y did not meet the holding period requirement of section 246(c)(1)(A) of the Code with respect to the shares of X stock, Y is not entitled to a dividends-received deduction with respect to the dividend received from X.

HOLDING

A corporate shareholder of a RIC must satisfy the holding period requirement of section 246(c)(1)(A) of the Code with respect to the RIC shares to qualify for the dividends-received deduction on dividends paid by the RIC.

DRAFTING INFORMATION

The principal author of this revenue ruling is Adrian Michur of the Office of Assistant Chief Counsel (Financial Institutions and Products). For further information regarding this revenue ruling contact Mr. Michur on (202) 566-3294 (not a toll-free call).