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Leslie Bonacum

Tax Code Treatment of SEC-regulated Investment Companies Modernized; Wolters Kluwer Law & Business Provides Guidance, Clarity

(RIVERWOODS, ILL., December 17, 2010) – Amid the Capitol Hill discussions and debates about Bush-era tax cuts, one bipartisan bill quietly cleared Congress and is awaiting President Obama’s signature. The Regulated Investment Company Modernization Act of 2010, updates federal tax code provisions affecting investment companies regulated by the SEC. Wolters Kluwer Law & Business has published a new white paper that details how this new law will affect investment companies. Wolters Kluwer Law & Business is a leading provider of information and software solutions in key specialty areas for legal and business professionals, with products under the CCH and Aspen names (

Congress Passes Legislation Modernizing Federal Tax Code Treatment of SEC-Regulated Investment Companies, was written by Principal Securities Law Analyst Jim Hamilton, JD, LLM. It expands on how the new legislation requires regulated investment companies to conform to, and interact with, other aspects of the tax code and applicable federal securities laws. Regulated investment companies under the code include open-ended investment companies (mutual fund where shareholders can redeem shares at net asset value) or closed-ended companies (exchange or market-traded fund with fixed number of shares which are not redeemable via shareholder demand).

Over the last two decades, many developments impacting the financial services industry, including new fund structures and distribution channels, are creating constraints on current sections of the tax code. This new legislation modernizes federal tax code provisions governing mutual funds that have not been updated in any meaningful or comprehensive way since the enactment of the Internal Revenue Code of 1986.

“What it does is reduce the burden arising from amended year-end tax information statements while improving a mutual fund's ability to meet its distribution requirements,” Hamilton said. “This also creates remedies for inadvertent mutual fund qualification failures, improves the tax treatment of investing in a fund-of-funds structure, as well as updates the tax treatment of fund capital losses.”

Investment Accounting and Reporting Changes

This legislation specifically:

  • Sets forth a special rule allowing unlimited carryovers of the net capital losses of regulated investment companies;
  • Allows funds to state a post-October capital loss and any late-year ordinary loss as arising on the first day of the following taxable year;
  • Permits specified gain and loss of a fund derived after October 31 of a calendar year to be deferred, for excise tax purposes, until January 1 of the following calendar year;
  • Exempts regulated investment companies from loss of tax-preferred status and additional tax for failure to satisfy the gross income and assets tests if such failure is due to reasonable cause – not willful neglect;
  • Revises the definitions of "capital gain dividend" and "exempt-interest dividend" as well as requiring such dividends to be reported to shareholders in written statements; and
  • Modifies rules for dividends paid by funds after the close of a taxable year, so called, spillover dividends.

Furthermore, regulated investment companies maintaining a qualified fund of funds can now pay exempt-interest dividends and offer its shareholders the foreign tax credit – without regard to certain investment requirements in state or local bonds and foreign securities. The legislation also revises the method for allocating fund earnings and profits to require them to be allocated first to distributions made prior to December 31 of a calendar year.

For More Information

To review a copy of the complete white paper, please click here.

More detail on financial and securities reform is at the Financial Reform News Center at, providing the legal community and others with a cohesive and robust selection of new developments and analysis; and Jim Hamilton’s World of Securities Regulation, offering unique analysis on securities law and regulation. 

Members of the press interested in speaking with Wolters Kluwer Law & Business securities and banking law experts should contact Eric Scott at 847-267-2179, or Leslie Bonacum at 847-267-7153,

About Wolters Kluwer Law & Business

Wolters Kluwer Law & Business is a leading provider of research products and software solutions in key specialty areas for legal and business professionals, as well as casebooks and study aids for law students. Its major product lines include Aspen Publishers, CCH, Kluwer Law International and Loislaw. Its markets include law firms, law schools, corporate counsel, health care organizations, and professionals requiring legal and compliance information. Wolters Kluwer Law & Business, a unit of Wolters Kluwer, is based in New York City and Riverwoods, Ill. Wolters Kluwer is a market-leading global information services company.





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