26 U.S.C. § 851 — Definition of regulated investment com-

Page 1951 TITLE 26—INTERNAL REVENUE CODE § 851 be allowed as a deduction ratably over the 120-month period beginning with the first month in the second half of such taxable year.’’ EFFECTIVE DATE OF 2014 AMENDMENT Amendment by Pub. L. 113–295 effective Dec. 19, 2014, subject to a savings provision, see section 221(b) of Pub. L. 113–295, set out as a note under section 1 of this title. EFFECTIVE DATE OF 2006 AMENDMENT Amendment by Pub. L. 109–280 applicable to contracts issued after Dec. 31, 1996, but only with respect to tax- able years beginning after Dec. 31, 2009, and to specified policy acquisition expenses determined for taxable years beginning after Dec. 31, 2009, see section 844(g)(1), (4) of Pub. L. 109–280, set out as a note under section 72 of this title. EFFECTIVE DATE OF 2003 AMENDMENT Amendment by Pub. L. 108–173 applicable to taxable years beginning after Dec. 31, 2003, see section 1201(k) of Pub. L. 108–173, set out as a note under section 62 of this title. EFFECTIVE DATE OF 1996 AMENDMENT Amendment by Pub. L. 104–191 applicable to taxable years beginning after Dec. 31, 1996, see section 301(j) of Pub. L. 104–191, set out as a note under section 62 of this title. EFFECTIVE DATE OF 1993 AMENDMENT Amendment by Pub. L. 103–66 applicable, except as otherwise provided, with respect to property acquired after Aug. 10, 1993, see section 13261(g) of Pub. L. 103–66, set out as an Effective Date note under section 197 of this title. EFFECTIVE DATE Pub. L. 101–508, title XI, § 11301(d)(1), Nov. 5, 1990, 104 Stat. 1388–449, provided that: ‘‘The amendments made by subsections (a) and (c) [enacting this section] shall apply to taxable years ending on or after September 30, 1990. Any capitalization required by reason of such amendments shall not be treated as a change in method of accounting for purposes of the Internal Revenue Code of 1986.’’ Subchapter M—Regulated Investment Companies and Real Estate Investment Trusts Part I. Regulated investment companies. II. Real estate investment trusts. III. Provisions which apply to both regulated in- vestment companies and real estate invest- ment trusts. IV. Real estate mortgage investment conduits. [V. Repealed.] Editorial Notes AMENDMENTS 2004—Pub. L. 108–357, title VIII, § 835(b)(12), Oct. 22, 2004, 118 Stat. 1594, struck out item for part V ‘‘Finan- cial asset securitization investment trusts’’. 1996—Pub. L. 104–188, title I, § 1621(c), Aug. 20, 1996, 110 Stat. 1867, added item for part V. 1988—Pub. L. 100–647, title I, § 1018(u)(30), Nov. 10, 1988, 102 Stat. 3591, added item for part IV. 1978—Pub. L. 95–600, title III, § 362(d)(8), Nov. 6, 1978, 92 Stat. 2852, added item for part III. PART I—REGULATED INVESTMENT COMPANIES Sec. 851. Definition of regulated investment company. 852. Taxation of regulated investment companies and their shareholders. Sec. 853. Foreign tax credit allowed to shareholders. 853A. Credits from tax credit bonds allowed to shareholders. 854. Limitations applicable to dividends received from regulated investment company. 855. Dividends paid by regulated investment com- pany after close of taxable year. Editorial Notes AMENDMENTS 2009—Pub. L. 111–5, div. B, title I, § 1541(b)(3), Feb. 17, 2009, 123 Stat. 362, added item 853A. 1980—Pub. L. 96–223, title IV, § 404(b)(7), Apr. 2, 1980, 94 Stat. 307, inserted ‘‘and taxable interest’’ after ‘‘divi- dends’’ in item 854 for taxable years after Dec. 31, 1980, and before Jan. 1, 1982. 1960—Pub. L. 86–779, § 10(b)(1), Sept. 14, 1960, 74 Stat. 1008, inserted ‘‘and Real Estate Investment Trusts’’ in subchapter M heading, part I and part II designations thereunder and part I designation preceding table of sections numbered 851 to 855. § 851. Definition of regulated investment com- pany (a) General rule For purposes of this subtitle, the term ‘‘regu- lated investment company’’ means any domestic corporation— (1) which, at all times during the taxable year— (A) is registered under the Investment Company Act of 1940, as amended (15 U.S.C. 80a–1 to 80b–2) as a management company or unit investment trust, or (B) has in effect an election under such Act to be treated as a business development company, or (2) which is a common trust fund or similar fund excluded by section 3(c)(3) of such Act (15 U.S.C. 80a–3(c)) from the definition of ‘‘invest- ment company’’ and is not included in the def- inition of ‘‘common trust fund’’ by section 584(a). (b) Limitations A corporation shall not be considered a regu- lated investment company for any taxable year unless— (1) it files with its return for the taxable year an election to be a regulated investment company or has made such election for a pre- vious taxable year; (2) at least 90 percent of its gross income is derived from— (A) dividends, interest, payments with re- spect to securities loans (as defined in sec- tion 512(a)(5)), and gains from the sale or other disposition of stock or securities (as defined in section 2(a)(36) of the Investment Company Act of 1940, as amended) or foreign currencies, or other income (including but not limited to gains from options, futures or forward contracts) derived with respect to its business of investing in such stock, secu- rities, or currencies, and (B) net income derived from an interest in a qualified publicly traded partnership (as defined in subsection (h)); and (3) at the close of each quarter of the taxable year— Page 1952 TITLE 26—INTERNAL REVENUE CODE § 851 (A) at least 50 percent of the value of its total assets is represented by— (i) cash and cash items (including receiv- ables), Government securities and securi- ties of other regulated investment compa- nies, and (ii) other securities for purposes of this calculation limited, except and to the ex- tent provided in subsection (e), 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, and (B) not more than 25 percent of the value of its total assets is invested in— (i) the securities (other than Govern- ment securities or the securities of other regulated investment companies) of any one issuer, (ii) the securities (other than the securi- ties of other regulated investment compa- nies) of two or more issuers which the tax- payer controls and which are determined, under regulations prescribed by the Sec- retary, to be engaged in the same or simi- lar trades or businesses or related trades or businesses, or (iii) the securities of one or more quali- fied publicly traded partnerships (as de- fined in subsection (h)). For purposes of paragraph (2), there shall be treated as dividends amounts included in gross income under section 951(a)(1)(A) or 1293(a) for the taxable year to the extent that, under sec- tion 959(a)(1) or 1293(c) (as the case may be), there is a distribution out of the earnings and profits of the taxable year which are attrib- utable to the amounts so included. For purposes of paragraph (2), the Secretary may by regula- tion exclude from qualifying income foreign cur- rency gains which are not directly related to the company’s principal business of investing in stock or securities (or options and futures with respect to stock or securities). For purposes of paragraph (2), amounts excludable from gross in- come under section 103(a) shall be treated as in- cluded in gross income. Income derived from a partnership (other than a qualified publicly traded partnership as defined in subsection (h)) or trust shall be treated as described in para- graph (2) only to the extent such income is at- tributable to items of income of the partnership or trust (as the case may be) which would be de- scribed in paragraph (2) if realized by the regu- lated investment company in the same manner as realized by the partnership or trust. (c) Rules applicable to subsection (b)(3) For purposes of subsection (b)(3) and this sub- section— (1) In ascertaining the value of the tax- payer’s investment in the securities of an issuer, for the purposes of subparagraph (B), there shall be included its proper proportion of the investment of any other corporation, a member of a controlled group, in the securi- ties of such issuer, as determined under regu- lations prescribed by the Secretary. (2) The term ‘‘controls’’ means the owner- ship in a corporation of 20 percent or more of the total combined voting power of all classes of stock entitled to vote. (3) The term ‘‘controlled group’’ means one or more chains of corporations connected through stock ownership with the taxpayer if— (A) 20 percent or more of the total com- bined voting power of all classes of stock en- titled to vote of each of the corporations (ex- cept the taxpayer) is owned directly by one or more of the other corporations, and (B) the taxpayer owns directly 20 percent or more of the total combined voting power of all classes of stock entitled to vote, of at least one of the other corporations. (4) The term ‘‘value’’ means, with respect to securities (other than those of majority-owned subsidiaries) for which market quotations are readily available, the market value of such se- curities; and with respect to other securities and assets, fair value as determined in good faith by the board of directors, except that in the case of securities of majority-owned sub- sidiaries which are investment companies such fair value shall not exceed market value or asset value, whichever is higher. (5) The term ‘‘outstanding voting securities of such issuer’’ shall include the equity securi- ties of a qualified publicly traded partnership (as defined in subsection (h)). (6) All other terms shall have the same meaning as when used in the Investment Com- pany Act of 1940, as amended. (d) Determination of status (1) In general A corporation which meets the requirements of subsections (b)(3) and (c) at the close of any quarter shall not lose its status as a regulated investment company because of a discrepancy during a subsequent quarter between the value of its various investments and such require- ments unless such discrepancy exists imme- diately after the acquisition of any security or other property and is wholly or partly the re- sult of such acquisition. A corporation which does not meet such requirements at the close of any quarter by reason of a discrepancy ex- isting 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 and in such cases it shall be considered to have met such requirements at the close of such quarter for purposes of applying the preceding sentence. (2) Special rules regarding failure to satisfy re- quirements If paragraph (1) does not preserve a corpora- tion’s status as a regulated investment com- pany for any particular quarter— (A) In general A corporation that fails to meet the re- quirements of subsection (b)(3) (other than a failure described in subparagraph (B)(i) of this paragraph) for such quarter shall never- theless be considered to have satisfied the Page 1953 TITLE 26—INTERNAL REVENUE CODE § 851 requirements of such subsection for such quarter if— (i) following the corporation’s identifica- tion of the failure to satisfy the require- ments of such subsection for such quarter, a description of each asset that causes the corporation to fail to satisfy the require- ments of such subsection at the close of such quarter is set forth in a schedule for such quarter filed in the manner provided by the Secretary, (ii) the failure to meet the requirements of such subsection for such quarter is due to reasonable cause and not due to willful neglect, and (iii)(I) the corporation disposes of the as- sets set forth on the schedule specified in clause (i) within 6 months after the last day of the quarter in which the corpora- tion’s identification of the failure to sat- isfy the requirements of such subsection occurred or such other time period pre- scribed by the Secretary and in the man- ner prescribed by the Secretary, or (II) the requirements of such subsection are otherwise met within the time period specified in subclause (I). (B) Rule for certain de minimis failures A corporation that fails to meet the re- quirements of subsection (b)(3) for such quarter shall nevertheless be considered to have satisfied the requirements of such sub- section for such quarter if— (i) such failure is due to the ownership of assets the total value of which does not ex- ceed the lesser of— (I) 1 percent of the total value of the corporation’s assets at the end of the quarter for which such measurement is done, or (II) $10,000,000, and (ii)(I) the corporation, following the identification of such failure, disposes of assets in order to meet the requirements of such subsection within 6 months after the last day of the quarter in which the cor- poration’s identification of the failure to satisfy the requirements of such sub- section occurred or such other time period prescribed by the Secretary and in the manner prescribed by the Secretary, or (II) the requirements of such subsection are otherwise met within the time period specified in subclause (I). (C) Tax (i) Tax imposed If subparagraph (A) applies to a corpora- tion for any quarter, there is hereby im- posed on such corporation a tax in an amount equal to the greater of— (I) $50,000, or (II) the amount determined (pursuant to regulations promulgated by the Sec- retary) by multiplying the net income generated by the assets described in the schedule specified in subparagraph (A)(i) for the period specified in clause (ii) by the highest rate of tax specified in sec- tion 11. (ii) Period For purposes of clause (i)(II), the period described in this clause is the period begin- ning on the first date that the failure to satisfy the requirements of subsection (b)(3) occurs as a result of the ownership of such assets and ending on the earlier of the date on which the corporation disposes of such assets or the end of the first quar- ter when there is no longer a failure to sat- isfy such subsection. (iii) Administrative provisions For purposes of subtitle F, a tax imposed by this subparagraph shall be treated as an excise tax with respect to which the defi- ciency procedures of such subtitle apply. (e) Investment companies furnishing capital to development corporations (1) General rule If the Securities and Exchange Commission determines, in accordance with regulations issued by it, and certifies to the Secretary not earlier than 60 days prior to the close of the taxable year of a management company or a business development company described in subsection (a)(1), that such investment com- pany is principally engaged in the furnishing of capital to other corporations which are principally engaged in the development or ex- ploitation of inventions, technological im- provements, new processes, or products not previously generally available, such invest- ment company may, in the computation of 50 percent of the value of its assets under sub- paragraph (A) of subsection (b)(3) for any quar- ter of such taxable year, include the value of any securities of an issuer, whether or not the investment company owns more than 10 per- cent of the outstanding voting securities of such issuer, the basis of which, when added to the basis of the investment company for secu- rities of such issuer previously acquired, did not exceed 5 percent of the value of the total assets of the investment company at the time of the subsequent acquisition of securities. The preceding sentence shall not apply to the securities of an issuer if the investment com- pany has continuously held any security of such issuer (or of any predecessor company of such issuer as determined under regulations prescribed by the Secretary) for 10 or more years preceding such quarter of such taxable year. (2) Limitation The provisions of this subsection shall not apply at the close of any quarter of a taxable year to an investment company if at the close of such quarter more than 25 percent of the value of its total assets is represented by secu- rities of issuers with respect to each of which the investment company holds more than 10 percent of the outstanding voting securities of such issuer and in respect of each of which or any predecessor thereof the investment com- pany has continuously held any security for 10 or more years preceding such quarter unless the value of its total assets so represented is reduced to 25 percent or less within 30 days after the close of such quarter. Page 1954 TITLE 26—INTERNAL REVENUE CODE § 851 (3) Determination of status For purposes of this subsection, unless the Securities and Exchange Commission deter- mines otherwise, a corporation shall be con- sidered to be principally engaged in the devel- opment or exploitation of inventions, techno- logical improvements, new processes, or prod- ucts not previously generally available, for at least 10 years after the date of the first acqui- sition of any security in such corporation or any predecessor thereof by such investment company if at the date of such acquisition the corporation or its predecessor was principally so engaged, and an investment company shall be considered at any date to be furnishing cap- ital to any company whose securities it holds if within 10 years prior to such date it has ac- quired any of such securities, or any securities surrendered in exchange therefor, from such other company or predecessor thereof. For purposes of the certification under this sub- section, the Securities and Exchange Commis- sion shall have authority to issue such rules, regulations and orders, and to conduct such investigations and hearings, either public or private, as it may deem appropriate. (4) Definitions The terms used in this subsection shall have the same meaning as in subsections (b)(3) and (c) of this section. (f) Certain unit investment trusts For purposes of this title— (1) A unit investment trust (as defined in the Investment Company Act of 1940)— (A) which is registered under such Act and issues periodic payment plan certificates (as defined in such Act) in one or more series, (B) substantially all of the assets of which, as to all such series, consist of (i) securities issued by a single management company (as defined in such Act) and securities acquired pursuant to subparagraph (C), or (ii) securi- ties issued by a single other corporation, and (C) which has no power to invest in any other securities except securities issued by a single other management company, when permitted by such Act or the rules and regu- lations of the Securities and Exchange Com- mission, shall not be treated as a person. (2) In the case of a unit investment trust de- scribed in paragraph (1)— (A) each holder of an interest in such trust shall, to the extent of such interest, be treated as owning a proportionate share of the assets of such trust; (B) the basis of the assets of such trust which are treated under subparagraph (A) as being owned by a holder of an interest in such trust shall be the same as the basis of his interest in such trust; and (C) in determining the period for which the holder of an interest in such trust has held the assets of the trust which are treated under subparagraph (A) as being owned by him, there shall be included the period for which such holder has held his interest in such trust. This subsection shall not apply in the case of a unit investment trust which is a segregated asset account under the insurance laws or regu- lations of a State. (g) Special rule for series funds (1) In general In the case of a regulated investment com- pany (within the meaning of subsection (a)) having more than one fund, each fund of such regulated investment company shall be treat- ed as a separate corporation for purposes of this title (except with respect to the defini- tional requirement of subsection (a)). (2) Fund defined For purposes of paragraph (1) the term ‘‘fund’’ means a segregated portfolio of assets, the beneficial interests in which are owned by the holders of a class or series of stock of the regulated investment company that is pre- ferred over all other classes or series in re- spect of such portfolio of assets. (h) Qualified publicly traded partnership For purposes of this section, the term ‘‘quali- fied publicly traded partnership’’ means a pub- licly traded partnership described in section 7704(b) other than a partnership which would satisfy the gross income requirements of section 7704(c)(2) if qualifying income included only in- come described in subsection (b)(2)(A). (i) Failure to satisfy gross income test (1) Disclosure requirement A corporation that fails to meet the require- ment of paragraph (2) of subsection (b) for any taxable year shall nevertheless be considered to have satisfied the requirement of such para- graph for such taxable year if— (A) following the corporation’s identifica- tion of the failure to meet such requirement for such taxable year, a description of each item of its gross income described in such paragraph is set forth in a schedule for such taxable year filed in the manner provided by the Secretary, and (B) the failure to meet such requirement is due to reasonable cause and not due to will- ful neglect. (2) Imposition of tax on failures If paragraph (1) applies to a regulated in- vestment company for any taxable year, there is hereby imposed on such company a tax in an amount equal to the excess of— (A) the gross income of such company which is not derived from sources referred to in subsection (b)(2), over (B) 1⁄9 of the gross income of such company which is derived from such sources. (Aug. 16, 1954, ch. 736, 68A Stat. 268; Pub. L. 85–866, title I, § 38, Sept. 2, 1958, 72 Stat. 1638; Pub. L. 91–172, title IX, § 908(a), Dec. 30, 1969, 83 Stat. 717; Pub. L. 94–12, title VI, § 602(a)(2), Mar. 29, 1975, 89 Stat. 58; Pub. L. 94–455, title XIX, §§ 1901(a)(109), 1906(b)(13)(A), Oct. 4, 1976, 90 Stat. 1783, 1834; Pub. L. 95–345, § 2(a)(3), Aug. 15, 1978, 92 Stat. 481; Pub. L. 95–600, title VII, § 701(s)(1), Nov. 6, 1978, 92 Stat. 2911; Pub. L. 97–424, title V, § 547(b)(1), Jan. 6, 1983, 96 Stat. 2199; Pub. L. 98–369, div. A, title X, § 1071(a)(1), July 18, 1984, 98 Stat. 1049; Pub. L. 99–514, title VI, §§ 652(a), (b), 653(a)–(c), 654(a), title XII, § 1235(f)(3), Oct. 22, Page 1955 TITLE 26—INTERNAL REVENUE CODE § 851 1986, 100 Stat. 2297, 2298, 2575; Pub. L. 100–647, title I, § 1006(m), (n)(1), (2)(A), (B), (4), (5), (o), Nov. 10, 1988, 102 Stat. 3415, 3416; Pub. L. 105–34, title XII, § 1271(a)–(b)(7), Aug. 5, 1997, 111 Stat. 1036, 1037; Pub. L. 108–357, title III, § 331(a)–(d), (f), Oct. 22, 2004, 118 Stat. 1476; Pub. L. 111–325, title II, § 201(a), (b), Dec. 22, 2010, 124 Stat. 3539, 3540; Pub. L. 113–295, div. A, title II, § 205(e), Dec. 19, 2014, 128 Stat. 4027; Pub. L. 115–97, title I, § 14212(b)(1)(B), Dec. 22, 2017, 131 Stat. 2217.) Editorial Notes REFERENCES IN TEXT The Investment Company Act of 1940, as amended, re- ferred to in subsecs. (a)(1), (b)(2)(A), (c)(6), and (f)(1), is title I of act Aug. 22, 1940, ch. 686, 54 Stat. 789, which is classified generally to subchapter I (§ 80a–1 et seq.) of chapter 2D of Title 15, Commerce and Trade. Section 2(a)(36) of the Act is classified to section 80a–2(a)(36) of Title 15. For complete classification of this Act to the Code, see section 80a–51 of Title 15 and Tables. AMENDMENTS 2017—Subsec. (b). Pub. L. 115–97 substituted ‘‘section 951(a)(1)(A)’’ for ‘‘section 951(a)(1)(A)(i)’’ in concluding provisions. 2014—Subsec. (d)(2)(A). Pub. L. 113–295 inserted ‘‘of this paragraph’’ after ‘‘subparagraph (B)(i)’’ in intro- ductory provisions. 2010—Subsec. (d). Pub. L. 111–325, § 201(a), designated existing provisions as par. (1), inserted heading, and added par. (2). Subsec. (i). Pub. L. 111–325, § 201(b), added subsec. (i). 2004—Subsec. (b). Pub. L. 108–357, § 331(b), inserted ‘‘(other than a qualified publicly traded partnership as defined in subsection (h))’’ after ‘‘derived from a part- nership’’ in concluding provisions. Subsec. (b)(2). Pub. L. 108–357, § 331(a), amended par. (2) generally. Prior to amendment, par. (2) read as fol- lows: ‘‘at least 90 percent of its gross income is derived from dividends, interest, payments with respect to se- curities loans (as defined in section 512(a)(5)), and gains from the sale or other disposition of stock or securities (as defined in section 2(a)(36) of the Investment Com- pany Act of 1940, as amended) or foreign currencies, or other income (including but not limited to gains from options, futures, or forward contracts) derived with re- spect to its business of investing in such stock, securi- ties, or currencies; and’’. Subsec. (b)(3)(B). Pub. L. 108–357, § 331(f), amended subpar. (B) generally. Prior to amendment, subpar. (B) read as follows: ‘‘not more than 25 percent of the value of its total assets is invested in the securities (other than Government securities or the securities of other regulated investment companies) of any one issuer, or of two or more issuers which the taxpayer controls and which are determined, under regulations prescribed by the Secretary, to be engaged in the same or similar trades or businesses or related trades or businesses.’’ Subsec. (c)(5), (6). Pub. L. 108–357, § 331(c), added par. (5) and redesignated former par. (5) as (6). Subsec. (h). Pub. L. 108–357, § 331(d), added subsec. (h). 1997—Subsec. (b). Pub. L. 105–34, § 1271(b)(1), in con- cluding provisions, substituted ‘‘paragraph (2), amounts excludable’’ for ‘‘paragraphs (2) and (3), amounts ex- cludable’’ and struck out ‘‘In the case of the taxable year in which a regulated investment company is com- pletely liquidated, there shall not be taken into ac- count under paragraph (3) any gain from the sale, ex- change, or distribution of any property after the adop- tion of the plan of complete liquidation.’’ at end. Subsec. (b)(2). Pub. L. 105–34, § 1271(a), inserted ‘‘and’’ at end. Subsec. (b)(3), (4). Pub. L. 105–34, § 1271(a), redesig- nated par. (4) as (3) and struck out former par. (3) which read as follows: ‘‘less than 30 percent of its gross in- come is derived from the sale or disposition of any of the following which was held for less than 3 months: ‘‘(A) stock or securities (as defined in section 2(a)(36) of the Investment Company Act of 1940, as amended), ‘‘(B) options, futures, or forward contracts (other than options, futures, or forward contracts on foreign currencies), or ‘‘(C) foreign currencies (or options, futures, or for- ward contracts on foreign currencies) but only if such currencies (or options, futures, or forward contracts) are not directly related to the company’s principal business of investing in stock or securities (or op- tions and futures with respect to stocks or securi- ties), and’’. Subsec. (c). Pub. L. 105–34, § 1271(b)(2), substituted ‘‘subsection (b)(3)’’ for ‘‘subsection (b)(4)’’ in heading and introductory provisions. Subsec. (d). Pub. L. 105–34, § 1271(b)(3), substituted ‘‘subsections (b)(3)’’ for ‘‘subsections (b)(4)’’. Subsec. (e)(1). Pub. L. 105–34, § 1271(b)(4), substituted ‘‘subsection (b)(3)’’ for ‘‘subsection (b)(4)’’. Subsec. (e)(4). Pub. L. 105–34, § 1271(b)(5), substituted ‘‘subsections (b)(3)’’ for ‘‘subsections (b)(4)’’. Subsec. (g). Pub. L. 105–34, § 1271(b)(6), redesignated subsec. (h) as (g) and struck out former subsec. (g) which provided for treatment of certain hedging trans- actions. Subsec. (g)(3). Pub. L. 105–34, § 1271(b)(7), struck out par. (3) which provided special rule for abnormal re- demptions. Subsec. (h). Pub. L. 105–34, § 1271(b)(6), redesignated subsec. (h) as (g). 1988—Subsec. (a)(1). Pub. L. 100–647, § 1006(m)(1), amended par. (1) generally. Prior to amendment, par. (1) read as follows: ‘‘which, at all times during the tax- able year, is registered under the Investment Company Act of 1940, as amended (15 U.S.C. 80a–1 to 80b–2), as a management company, business development company, or unit investment trust, or’’. Subsec. (b). Pub. L. 100–647, § 1006(n)(1), (5), inserted at end ‘‘Income derived from a partnership or trust shall be treated as described in paragraph (2) only to the ex- tent such income is attributable to items of income of the partnership or trust (as the case may be) which would be described in paragraph (2) if realized by the regulated investment company in the same manner as realized by the partnership or trust. In the case of the taxable year in which a regulated investment company is completely liquidated, there shall not be taken into account under paragraph (3) any gain from the sale, ex- change, or distribution of any property after the adop- tion of the plan of complete liquidation.’’ Pub. L. 100–647, § 1006(n)(2)(B), substituted ‘‘which are not directly related’’ for ‘‘which are not ancillary’’ in last sentence. Subsec. (b)(3). Pub. L. 100–647, § 1006(n)(2)(A), amended par. (3) generally. Prior to amendment, par. (3) read as follows: ‘‘less than 30 percent of its gross income is de- rived from the sale or other disposition of stock or se- curities held for less than 3 months; and’’. Subsec. (e)(1). Pub. L. 100–647, § 1006(m)(2), substituted ‘‘a management company or a business development company described in subsection (a)(1)’’ for ‘‘a reg- istered management company or registered business development company’’. Subsec. (g)(2)(A)(i). Pub. L. 100–647, § 1006(n)(4), sub- stituted ‘‘contractual obligation’’ for ‘‘contractual op- tion’’. Subsec. (h). Pub. L. 100–647, § 1006(o)(1), redesignated subsec. (q) as (h). Subsec. (h)(3). Pub. L. 100–647, § 1006(o)(2), added par. (3). Subsec. (q). Pub. L. 100–647, § 1006(o)(1), redesignated subsec. (q) as (h). 1986—Subsec. (a)(1). Pub. L. 99–514, § 652(a), sub- stituted ‘‘as a management company, business develop- ment company, or unit investment trust’’ for ‘‘either as a management company or as a unit investment trust’’. Subsec. (b). Pub. L. 99–514, § 1235(f)(3), inserted ‘‘or 1293(a)’’ and ‘‘or 1293(c) (as the case may be)’’, in con- cluding provision. Page 1956 TITLE 26—INTERNAL REVENUE CODE § 851 Pub. L. 99–514, § 653(c), inserted before last sentence ‘‘For purposes of paragraph (2), the Secretary may by regulation exclude from qualifying income foreign cur- rency gains which are not ancillary to the company’s principal business of investing in stock or securities (or options and futures with respect to stock or securi- ties).’’ Subsec. (b)(2). Pub. L. 99–514, § 653(b), inserted ‘‘(as de- fined in section 2(a)(36) of the Investment Company Act of 1940, as amended) or foreign currencies, or other in- come (including but not limited to gains from options, futures, or forward contracts) derived with respect to its business of investing in such stock, securities, or currencies’’. Subsec. (e)(1). Pub. L. 99–514, § 652(b), substituted ‘‘registered management company or registered busi- ness development company’’ for ‘‘registered manage- ment company’’. Subsec. (g). Pub. L. 99–514, § 653(a), added subsec. (g). Subsec. (q). Pub. L. 99–514, § 654(a), added subsec. (q). 1984—Subsec. (a). Pub. L. 98–369 struck out ‘‘(other than a personal holding company as defined in section 542)’’ after ‘‘any domestic corporation’’ in introductory provisions. 1983—Subsec. (b). Pub. L. 97–424 substituted ‘‘section 103(a)’’ for ‘‘section 103(a)(1)’’ after ‘‘gross income under’’. 1978—Subsec. (b). Pub. L. 95–600 required that for pur- poses of pars. (2) and (3), amounts excludable from gross income under section 103(a)(1) shall be treated as in- cluded in gross income. Subsec. (b)(2). Pub. L. 95–345 inserted provision relat- ing to payments with respect to securities loans. 1976—Subsec. (a)(1). Pub. L. 94–455, § 1901(a)(109)(A), struck out ‘‘54 Stat. 789;’’ before ‘‘15 U.S.C. 80a–1 to 80b–2)’’. Subsec. (b)(1), (4)(B). Pub. L. 94–455, § 1901(a)(109)(B), struck out ‘‘which began after December 31, 1941’’ after ‘‘previous taxable year’’ in par. (1), and ‘‘or his dele- gate’’ after ‘‘Secretary’’ in par. (4)(B). Subsecs. (c), (d). Pub. L. 94–455, § 1906(b)(13)(A), struck out ‘‘or his delegate’’ after ‘‘Secretary’’ wherever ap- pearing. 1975—Subsec. (b). Pub. L. 94–12 inserted provisions di- recting that, for purposes of par. (2), there shall be treated as dividends amounts included in gross income under section 951(a)(1)(A)(i) for the taxable year to the extent that, under section 959(a)(1), there is a distribu- tion out of earnings and profits of the taxable year which are attributable to the amounts so included. 1969—Subsec. (f). Pub. L. 91–172 added subsec. (f). 1958—Subsec. (e)(1). Pub. L. 85–866, § 38(a), substituted ‘‘not earlier than 60 days’’ for ‘‘not less than 60 days’’ in first sentence. Subsec. (e)(2). Pub. L. 85–866, § 38(b), substituted ‘‘issuer’’ for ‘‘issues’’. Statutory Notes and Related Subsidiaries EFFECTIVE DATE OF 2017 AMENDMENT Pub. L. 115–97, title I, § 14212(c), Dec. 22, 2017, 131 Stat. 2217, provided that: ‘‘The amendments made by this section [amending this section and sections 951, 952, 953, 964, and 970 of this title and repealing section 955 of this title] shall apply to taxable years of foreign corpora- tions beginning after December 31, 2017, and to taxable years of United States shareholders in which or with which such taxable years of foreign corporations end.’’ EFFECTIVE DATE OF 2014 AMENDMENT Amendment by Pub. L. 113–295 effective as if included in the provision of the Regulated Investment Company Modernization Act of 2010, Pub. L. 111–325, to which such amendment relates, with savings provision in cer- tain cases of an election by a regulated investment company under section 852(b)(8) of this title, see sec- tion 205(f) of Pub. L. 113–295, set out as a note under section 852 of this title. EFFECTIVE DATE OF 2010 AMENDMENT Pub. L. 111–325, title II, § 201(d), Dec. 22, 2010, 124 Stat. 3541, provided that: ‘‘The amendments made by this section [amending this section and section 852 of this title] shall apply to taxable years with respect to which the due date (determined with regard to any exten- sions) of the return of tax for such taxable year is after the date of the enactment of this Act [Dec. 22, 2010].’’ EFFECTIVE DATE OF 2004 AMENDMENT Amendment by Pub. L. 108–357 applicable to taxable years beginning after Oct. 22, 2004, see section 331(h) of Pub. L. 108–357, set out as a note under section 469 of this title. EFFECTIVE DATE OF 1997 AMENDMENT Amendment by Pub. L. 105–34 applicable to taxable years beginning after Aug. 5, 1997, see section 1271(c) of Pub. L. 105–34, set out as a note under section 817 of this title. EFFECTIVE DATE OF 1988 AMENDMENT Pub. L. 100–647, title I, § 1006(n)(2)(C), Nov. 10, 1988, 102 Stat. 3415, provided that: ‘‘Subparagraph (C) of section 851(b)(3) of the 1986 Code (as amended by subparagraph (A)), and the amendment made by subparagraph (B) [amending this section], shall apply to taxable years beginning after the date of the enactment of this Act [Nov. 10, 1988].’’ Amendment by section 1006(m), (n)(1), (2)(A), (4), (5), (o) of Pub. L. 100–647 effective, except as otherwise pro- vided, as if included in the provision of the Tax Reform Act of 1986, Pub. L. 99–514, to which such amendment relates, see section 1019(a) of Pub. L. 100–647, set out as a note under section 1 of this title. EFFECTIVE DATE OF 1986 AMENDMENT Pub. L. 99–514, title VI, § 652(c), Oct. 22, 1986, 100 Stat. 2297, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after December 31, 1986.’’ Pub. L. 99–514, title VI, § 653(d), Oct. 22, 1986, 100 Stat. 2298, provided that: ‘‘The amendments made by this section [amending this section] shall apply to taxable years beginning after the date of the enactment of this Act [Oct. 22, 1986].’’ Pub. L. 99–514, title VI, § 654(b), Oct. 22, 1986, 100 Stat. 2298, provided that: ‘‘(1) IN GENERAL.—The amendment made by sub- section (a) [amending this section] shall apply to tax- able years beginning after the date of the enactment of this Act [Oct. 22, 1986]. ‘‘(2) TREATMENT OF CERTAIN EXISTING SERIES FUNDS.— In the case of a regulated investment company which has more than one fund on the date of the enactment of this act, and has before such date been treated for Federal income tax purposes as a single corporation— ‘‘(A) the amendment made by subsection (a), and the resulting treatment of each fund as a separate corporation, shall not give rise to the realization or recognition of income or loss by such regulated in- vestment company, its funds, or its shareholders, and ‘‘(B) the tax attributes of such regulated invest- ment company shall be appropriately allocated among its funds.’’ Amendment by section 1235(f)(3) of Pub. L. 99–514 ap- plicable to taxable years of foreign corporations begin- ning after Dec. 31, 1986, see section 1235(h) of Pub. L. 99–514, set out as an Effective Date note under section 1291 of this title. EFFECTIVE DATE OF 1984 AMENDMENT Amendment by Pub. L. 98–369 applicable to taxable years beginning after Dec. 31, 1982, with certain excep- tions, see section 1071(a)(5) of Pub. L. 98–369, set out as a note under section 852 of this title. EFFECTIVE DATE OF 1978 AMENDMENT Pub. L. 95–600, title VII, § 701(s)(3), Nov. 6, 1978, 92 Stat. 2911, provided that: ‘‘The amendments made by this section [amending this section and section 852 of Page 1957 TITLE 26—INTERNAL REVENUE CODE § 852 this title] shall apply to taxable years beginning after December 31, 1975.’’ Amendment by Pub. L. 95–345 applicable with respect to amounts received after Dec. 31, 1976, as payments with respect to securities loans (as defined in section 512(a)(5) of this title), and transfers of securities, under agreements described in section 1058 of this title, oc- curring after such date, see section 2(e) of Pub. L. 95–345, set out as a note under section 509 of this title. EFFECTIVE DATE OF 1976 AMENDMENT Amendment by section 1901(a)(109) of Pub. L. 94–455 effective for taxable years beginning after Dec. 31, 1976, see section 1901(d) of Pub. L. 94–455, set out as a note under section 2 of this title. EFFECTIVE DATE OF 1975 AMENDMENT Amendment by Pub. L. 94–12 applicable to taxable years of foreign corporations beginning after Dec. 31, 1975, and to taxable years of United States shareholders (within the meaning of section 951(b) of this title) with- in which or with which such taxable years of such for- eign corporations end, see section 602(f) of Pub. L. 94–12, set out as an Effective Date note under section 954 of this title. EFFECTIVE DATE OF 1969 AMENDMENT Pub. L. 91–172, title IX, § 908(b), Dec. 30, 1969, 83 Stat. 718, provided that: ‘‘The amendment made by sub- section (a) [amending this section] shall apply to tax- able years of unit investment trusts ending after De- cember 31, 1968, and to taxable years of holders of inter- ests in such trusts ending with or within such taxable years of such trusts. The enactment of this section shall not be construed to result in the realization of gain or loss by any unit investment trust or by any holder of an interest in a unit investment trust.’’ EFFECTIVE DATE OF 1958 AMENDMENT Amendment by Pub. L. 85–866 applicable to taxable years beginning after Dec. 31, 1953, and ending after Aug. 16, 1954, see section 1(c)(1) of Pub. L. 85–866, set out as a note under section 165 of this title. § 852. Taxation of regulated investment compa- nies and their shareholders (a) Requirements applicable to regulated invest- ment companies The provisions of this part (other than sub- section (c) of this section) shall not be applica- ble to a regulated investment company for a taxable year unless— (1) the deduction for dividends paid during the taxable year (as defined in section 561, but without regard to capital gain dividends) equals or exceeds the sum of— (A) 90 percent of its investment company taxable income for the taxable year deter- mined without regard to subsection (b)(2)(D); and (B) 90 percent of the excess of (i) its inter- est income excludable from gross income under section 103(a) over (ii) its deductions disallowed under sections 265 and 171(a)(2), and (2) either— (A) the provisions of this part applied to the investment company for all taxable years ending on or after November 8, 1983, or (B) as of the close of the taxable year, the investment company has no earnings and profits accumulated in any taxable year to which the provisions of this part (or the cor- responding provisions of prior law) did not apply to it. The Secretary may waive the requirements of paragraph (1) for any taxable year if the regu- lated investment company establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distribu- tions previously made to meet the requirements of section 4982. (b) Method of taxation of companies and share- holders (1) Imposition of tax on regulated investment companies There is hereby imposed for each taxable year upon the investment company taxable in- come of every regulated investment company a tax computed as provided in section 11, as though the investment company taxable in- come were the taxable income referred to in section 11. (2) Investment company taxable income The investment company taxable income shall be the taxable income of the regulated investment company adjusted as follows: (A) There shall be excluded the amount of the net capital gain, if any. (B) The net operating loss deduction pro- vided in section 172 shall not be allowed. (C) The deductions for corporations pro- vided in part VIII (except section 248) in sub- chapter B (section 241 and following, relat- ing to the deduction for dividends received, etc.) shall not be allowed. (D) The deduction for dividends paid (as defined in section 561) shall be allowed, but shall be computed without regard to capital gain dividends and exempt-interest divi- dends. (E) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual ac- counting period). (F) The taxable income shall be computed without regard to section 454(b) (relating to short-term obligations issued on a discount basis) if the company so elects in a manner prescribed by the Secretary. (G) There shall be deducted an amount equal to the tax imposed by subsections (d)(2) and (i) of section 851 for the taxable year. (3) Capital gains (A) Imposition of tax There is hereby imposed for each taxable year in the case of every regulated invest- ment company a tax, determined as provided in section 11(b), on the excess, if any, of the net capital gain over the deduction for divi- dends paid (as defined in section 561) deter- mined with reference to capital gain divi- dends only. (B) Treatment of capital gain dividends by shareholders A capital gain dividend shall be treated by the shareholders as a gain from the sale or exchange of a capital asset held for more than 1 year. (C) Definition of capital gain dividend For purposes of this part—