Frequently Asked Questions
Who is eligible for the Undistributed Capital Gains Tax Credit?
Applies when a RIC designates undistributed capital gains in a notice to shareholders; the shareholder must increase their share basis and claim the credit on their tax return.
How does the Undistributed Capital Gains Tax Credit work?
Shareholders are treated as having paid the tax imposed on the RIC for undistributed capital gains, allowing the shareholder to claim a credit or refund for that tax on their own return.
What law authorizes the Undistributed Capital Gains Tax Credit?
The Undistributed Capital Gains Tax Credit is authorized under IRC §852(b)(3)(D) of the Internal Revenue Code (Title 26, United States Code).
Statutory Text — IRC §852
Source: Internal Revenue Code, Title 26, United States Code
§ 852. Taxation of regulated investment companies and their shareholders(a) Requirements applicable to regulated investment companiesThe provisions of this part (other than subsection (c) of this section) shall not be applicable 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 determined without regard to subsection (b)(2)(D); and
(B) 90 percent of the excess of (i) its interest 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 corresponding provisions of prior law) did not apply to it.
The Secretary may waive the requirements of paragraph (1) for any taxable year if the regulated investment company establishes to the satisfaction of the Secretary that it was unable to meet such requirements by reason of distributions previously made to meet the requirements of section 4982.
(b) Method of taxation of companies and shareholders(1) Imposition of tax on regulated investment companiesThere is hereby imposed for each taxable year upon the investment company taxable income of every regulated investment company a tax computed as provided in section 11, as though the investment company taxable income were the taxable income referred to in section 11.
(2) Investment company taxable incomeThe 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 provided in section 172 shall not be allowed.
(C) The deductions for corporations provided in part VIII (except section 248) in subchapter B (section 241 and following, relating 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 dividends.
(E) The taxable income shall be computed without regard to section 443(b) (relating to computation of tax on change of annual accounting 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.
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