Ruling 91-26

Corporation Business Tax
Regulated Investment Companies

This Ruling has been clarified by Ruling 92-10; obsoleted in part by AN 94(1); cited in Ruling 2001-1

FACTS:

1. A corporation [hereinafter, "the Company"] is a regulated investment company, as defined in 26 U.S.C. §851(a).
2. Under 26 U.S.C. §851(b), the Company is "considered a regulated investment company."
3. The Company has more than one fund, as defined in 26 U.S.C. §851(h)(2).
4. The Company carries on, or has the right to carry on, business in Connecticut. Conn. Gen. Stat. §12-214.

ISSUE:

Whether each fund of a regulated investment company having more than one fund is treated for all corporation business tax purposes as a separate corporation.

DISCUSSION:

In the case of a regulated investment company (within the meaning of [26 U.S.C. §851(a)]) having more than one fund, each fund of such regulated investment company shall be treated as a separate corporation for purposes of [title 26 of the United States Code] (except with respect to the definitional requirement of [26 U.S.C. §851(a)]).

26 U.S.C. §851(h)(1).

This subsection was added by the Tax Reform Act of 1986; Pub. L. No. 99-514, §654(a), 100 Stat. 2085, 2298. By the addition of this subsection, Congress has adopted the position unsuccessfully advanced by the Commissioner of Internal Revenue in Union Trusteed Funds, Inc. v. Commissioner, 8 T.C. 1133 (1947), acq., 1947-2 C.B. 4. There the Commissioner had argued that a regulated investment company (with five specific classes of stock, each of which was preferred over all other classes with respect to assets specifically allocated to that class):

must take the net long term capital gain, if any, of each fund, deduct therefrom the net short term capital loss, if any, of that fund, and the capital gain dividends, if any, distributed to the shareholders of that fund, paying tax on any remainder. The practical effect of this procedure is to treat each fund as though it were a separate corporation, a novel theory and one for which we find no support in either the statute, the regulations, or the decisions.

Id. at 1137.

After the passage of the Tax Reform Act of 1986, the procedure is no longer theoretical. "[In the case of RICs that have so-called series funds, each fund is treated as a separate corporation." S. Rep. No. 514, 99th Cong., 2d Sess. II-243, 1986 U.S. Code Cong. & Admin. News 4331.

Furthermore, the Internal Revenue Service, in Rev. Rul. 88-14, 1988-1 C.B. 405, has declared Rev. Rul. 56-246, 1956-1 C.B. 316, to be obsolete. In Rev. Rul. 56-246, the Service reiterated that "[a] multi-fund regulated investment company constitutes one taxpayer for Federal income tax purposes and may not report, as separate entities the segregated gains and losses of its various funds." It was ruled therein that, in the case of a multi-fund regulated investment company, "no gain or loss is realized upon the transfer of securities, for an offsetting transfer of cash, directly between one fund and another within the same company, and the basis of such securities for the purpose of determining gain or loss by the company upon their sale remains unchanged." Id. at 316.

The corporation business tax is "a tax or excise upon [a company's] franchise for the privilege of carrying on or doing business within the state in a corporate capacity ...." Conn. Gen. Stat. §12-214.

The thing taxed is not the mere dealing in merchandise, in which the actual transactions may be the same, whether conducted by individuals or corporations, but the tax is laid upon the privileges which exist in conducting business with the advantages which inhere in the corporate capacity of those taxed, and which are not enjoyed by private firms or individuals. These advantages are obvious, and have led to the formation of such companies in nearly all branches of trade. The continuity of the business, without interruption by death or dissolution, the transfer of property interests by the disposition of shares of stock, the advantages of business controlled and managed by corporate directors, the general absence of individual liability, these and other things inhere in the advantages of business thus conducted, which do not exist when the same business is conducted by private individuals or partnerships. It is this distinctive privilege which is the subject of taxation, not the mere buying or selling or handling of goods which may be the same, whether done by corporations or individuals.

Flint v. Stone Tracy Co., 220 U.S. 107, 161-162 (1911) (quoted in Spector Motor Service, Inc. v. Walsh, 135 Conn. 37, 66-67, 61 A.2d 89 (1948)).

Corporations are subject to the tax, because they enjoy the privileges derived from conducting business in a corporate capacity. A fund that is treated as a separate corporation pursuant to 26 U.S.C. §851(h) is not subject to the tax, because, considered alone, it does not enjoy the privileges derived from conducting business in a corporate capacity.

Nonetheless, each fund will be assigned its own tax registration number and will file its own corporation business tax return (just as each has been assigned its own employer identification number and files its own federal income tax return). Each fund will compute its net income as though it were a separate corporation, provided, however, that any minimum or maximum additional tax under Conn. Gen. Stat. §12-219(a)(2) will be calculated by disregarding this treatment of the funds as separate corporations.

RULING:

Each fund of a regulated investment company having more than one fund is treated for all corporation business tax purposes (other than the calculation of any minimum or maximum additional tax under Conn. Gen. Stat. §12-219(a)(2)) as a separate corporation.

LEGAL DIVISION

August 29, 1991