2003 HTML Instructions for Form 1120-RIC,

This is archived information that pertains only to the 2003 Tax Year. If you
are looking for information for the current tax year, go to the Tax Prep Help Area.

Purpose of Form

Use Form 1120-RIC, U.S. Income Tax Return for Regulated Investment Companies, to report the income, gains, losses, deductions, credits, and to figure the income tax liability of a regulated investment company as defined in section 851.

Who Must File

A domestic corporation that elects to be treated as a RIC for the tax year (or has made an election for a prior tax year) and meets the requirements listed below must file Form 1120-RIC. The election is made by computing taxable income as a RIC on Form 1120-RIC.

RIC Requirements

A corporation that elects to be treated as a RIC must be a domestic corporation that:

Is registered with the Securities and Exchange Commission throughout the tax year as a management company or unit investment trust under the Investment Company Act of 1940 (the ICA),
Has an election in effect under the ICA to be treated as a business development company, or
Is a common trust fund or similar fund that is neither an investment company under section 3(c)(3) of the ICA nor a common trust fund as defined under section 584(a).

In addition, the corporation must meet the requirements 1 through 5 below in order to qualify as a RIC.

At least 90% of its gross income (including tax-exempt interest income) must be derived from the following items.
- Dividends,
- Interest,
- Payments with respect to securities loans (as defined in section 512(a)(5)),
- Gains from the sale or other disposition of stock or securities (as defined in ICA section 2(a)(36)) or foreign currencies, or
- Other income (including gains from options, futures, or forward contracts) derived from the company's business of investing in such stock, securities, or currencies.
  
  Income from a partnership or trust qualifies under the 90% test to the extent the company's distributive share of such income is from items described above as realized by the partnership or trust.
  
  Income that a RIC receives in the normal course of business as a reimbursement from its investment advisor is qualifying income for purposes of the 90% test if the reimbursement is includible in the RIC's gross income.
At the end of each quarter of the company's tax year, at least 50% of the value of its assets must be invested in the following items.
- Cash and cash items (including receivables),
- Government securities,
- Securities of other RICs, and
- Securities of other issuers, except that the investment in a single issuer of securities may not exceed 5% of the value of the company's assets or 10% of the outstanding voting securities of the issuer (except as provided in section 851(e)). See sections 851(b)(3) and 851(c).
At the end of each quarter of the company's tax year, no more than 25% of the value of the company's assets may be invested in the securities (excluding government securities or securities of other RICs) of a single issuer or in the securities of two or more issuers controlled by the RIC and engaged in the same or related trades or businesses. See sections 851(b)(3) and 851(c).
The company's deduction for dividends paid for the tax year (as defined in section 561, but without regard to capital gain dividends) equals or exceeds the sum of:
- 90% of its investment company taxable income determined without regard to section 852(b)(2)(D); and
- 90% of the excess of the company's interest income excludable from gross income under section 103(a) over its deductions disallowed under sections 265 and 171(a)(2).
The company must have (a) been a RIC for all tax years ending after November 7, 1983, or (b) had at the end of the current tax year, no accumulated earnings and profits from any non-RIC tax year.

Note:

For this purpose, distributions after 2002 are treated as made from the earliest earnings and profits accumulated in any non-RIC tax year. See section 852(c)(3). Also see section 852(e) for procedures that may allow the RIC to avoid disqualification for the initial year the RIC did not meet the requirement under 5(b) above.

Definition of a Fund

A fund is a separate portfolio of assets, whose beneficial interests are owned by the holders of a class or series of stock that is preferred over all other classes or series for that portfolio of assets.

Note:

As used in these instructions and Form 1120-RIC, the term “fund” refers to the above definition and to any RIC that does not have more than one portfolio of assets.

Where To File

File the fund's return at the applicable IRS address listed below.

If the fund's principal business, office, or agency is located in:	And the total assets at the end of the tax year (Form 1120-RIC, page 1, item D) are:	Use the following Internal Revenue Service Center address:
Connecticut, Delaware, District of Columbia, Illinois, Indiana, Kentucky, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, North Carolina, Ohio, Pennsylvania, Rhode Island, South Carolina, Vermont, Virginia, West Virginia, Wisconsin	Less than $10 million $10 million or more	Cincinnati, OH 45999-0012 Ogden, UT 84201-0012
Alabama, Alaska, Arizona, Arkansas, California, Colorado, Florida, Georgia, Hawaii, Idaho, Iowa, Kansas, Louisiana, Minnesota, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, North Dakota, Oklahoma, Oregon, South Dakota, Tennessee, Texas, Utah, Washington, Wyoming	Any amount	Ogden, UT 84201-0012

When To File

Generally, the fund must file its income tax return by the 15th day of the 3rd month after the end of its tax year. A new fund filing a short period return must generally file by the 15th day of the 3rd month after the short period ends. A fund that has dissolved must generally file by the 15th day of the 3rd month after the date it dissolved.

If the due date falls on a Saturday, Sunday, or legal holiday, the fund may file on the next business day.

Private delivery services. Funds can use certain private delivery services designated by the IRS to meet the “timely mailing as timely filing/paying” rule for tax returns and payments. The most recent list of designated private delivery services was published by the IRS in September 2002.

The list includes only the following.

Airborne Express (Airborne): Overnight Air Express Service, Next Afternoon Service, and Second Day Service.
DHL Worldwide Express (DHL): DHL “Same Day” Service, and DHL USA Overnight.
Federal Express (FedEx): FedEx Priority Overnight, FedEx Standard Overnight, FedEx 2Day, FedEx International Priority, and FedEx International First.
United Parcel Service (UPS): UPS Next Day Air, UPS Next Day Air Saver, UPS 2nd Day Air, UPS 2nd Day Air A.M., UPS Worldwide Express Plus, and UPS Worldwide Express.

The private delivery service can tell you how to get written proof of the mailing date.

Extension of time to file. File Form 7004, Application for Automatic Extension of Time To File Corporation Income Tax Return, to request a 6-month extension of time to file.

Who Must Sign

The return must be signed and dated by the president, vice president, treasurer, assistant treasurer, chief accounting officer, or any other corporate officer (such as tax officer) authorized to sign. Receivers, trustees, or assignees must also sign and date any return filed on behalf of a corporation.

Note:

If this return is being filed for a series fund (as discussed in section 851(g)(2)), the return may be signed by any officer authorized to sign for the RIC in which the fund is a series.

If an employee of the fund completes Form 1120-RIC, the paid preparer's space should remain blank. Anyone who prepares Form 1120-RIC but does not charge the fund should not complete that section. Generally, anyone who is paid to prepare the return must sign it and fill in the “Paid Preparer's Use Only ” area.

The paid preparer must complete the required preparer information, sign the return in the space provided for the preparer's signature, and, give a copy of the return to the taxpayer.

Paid Preparer Authorization

If the fund wants to allow the IRS to discuss its 2003 tax return with the paid preparer who signed it, check the “Yes” box in the signature area of the return. This authorization applies only to the individual whose signature appears in the “Paid Preparer's Use Only” section of the fund's return. It does not apply to the firm, if any, shown in that section.

If the “Yes” box is checked, the fund is authorizing the IRS to call the paid preparer to answer any questions that may arise during the processing of its return. The fund is also authorizing the paid preparer to:

Give the IRS any information that is missing from the return,
Call the IRS for information about the processing of the fund's return or the status of any related refund or payment(s), and
Respond to certain IRS notices that the fund has shared with the preparer about math errors, offsets, and return preparation. The notices will not be sent to the preparer.

The fund is not authorizing the paid preparer to receive any refund check, bind the fund to anything (including any additional tax liability), or otherwise represent the fund before the IRS. If the fund wants to expand the paid preparer's authorization, see Pub. 947, Practice Before the IRS and Power of Attorney.

The authorization cannot be revoked. However, the authorization will automatically end no later than the due date (without regard to extensions) for filing the fund's 2004 tax return.

Other Forms and Statements That May Be Required

Forms

The fund may have to file some of the following forms. See the form for more information.

Form W-2, Wage and Tax Statement; and Form W-3, Transmittal of Wage and Tax Statements. Use these forms to report wages, tips, and other compensation, and withheld income, social security, and Medicare taxes for employees.

Form W-2G, Certain Gambling Winnings. Report gambling winnings from horse racing, dog racing, jai alai, lotteries, keno, bingo, slot machines, sweepstakes, wagering pools, etc.

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation. Use this form to report certain transfers to foreign corporations under section 6038B.

Form 940 or Form 940-EZ, Employer's Annual Federal Unemployment (FUTA) Tax Return. The fund may be liable for FUTA tax and may have to file Form 940 or Form 940-EZ if it either:

Paid wages of $1,500 or more in any calendar quarter in 2002 or 2003 or
Had one or more employee who worked for the fund for at least some part of a day in any 20 or more different weeks in 2002 or 20 or more different weeks in 2003.

Form 941, Employer's Quarterly Federal Tax Return. Employers must file this form to report payroll income tax withheld and employer and employee social security and Medicare taxes. Also, see Trust fund recovery penalty on page 6.

Form 945, Annual Return of Withheld Federal Income Tax. File Form 945 to report income tax withheld from nonpayroll distributions or payments, such as the following income:

Pensions, annuities, IRAs, military retirement, gambling winnings,
Indian gaming profits, and backup withholding.

Also, see Trust fund recovery penalty on
page 6.

Form 966, Corporate Dissolution or Liquidation. File Form 966 to report the adoption of a resolution or plan to dissolve the fund or liquidate any of its stock.

Form 972, Consent of Shareholder To Include Specific Amount in Gross Income, and Form 973, Corporation Claim for Deduction for Consent Dividends. Use these forms to report a consent dividend under section 565 or to claim a consent dividend deduction under section 561.

Form 1042, Annual Withholding Tax Return for U.S. Source Income of Foreign Persons; Form 1042-S, Foreign Person's U.S. Source Income Subject to Withholding; and Form 1042-T, Annual Summary and Transmittal of Forms 1042-S. Use these forms to report and send withheld tax on payments or distributions made to nonresident alien individuals, foreign partnerships, or foreign corporations to the extent these payments constitute gross income from sources within the United States (see sections 861 through 865).

Also, see sections 1441 and 1442, and Pub. 515, Withholding of Tax on Nonresident Aliens and Foreign Entities.

Form 1096, Annual Summary and Transmittal of U.S. Information Returns. Use Form 1096 to transmit Forms 1099, 1098, 5498, and W-2G to the Internal Revenue Service.

Form 1098, Mortgage Interest Statement: Report the receipt from any individual of $600 or more of mortgage interest (including points) in the course of the fund's trade or business and reimbursements of overpaid interest.

Form 1099-A. Report Acquisitions and abandonments of secured property.

Form 1099-B. Report proceeds from broker and barter exchange transactions.

Form 1099-C. Report cancellation of a debt.

Form 1099-DIV. Report certain dividends and distributions.

Form 1099-INT. Report interest income.

Form 1099-LTC. Report certain payments made under a long-term care insurance contract, and certain accelerated death benefits.

Form 1099-MISC. Report miscellaneous income (e.g., payments to certain fishing boat crew members; payments to providers of health and medical services; rent or royalty payments; and nonemployee compensation, etc.).

Note: Every fund must file Form 1099-MISC if it makes payments of rents, commissions, or other fixed or determinable income (see section 6041) totaling $600 or more to any one person in the course of its trade or business during the calendar year.

Form 1099-MSA. Report distributions from an Archer MSA or Medicare+Choice MSA.

Form 1099-OID. Report original issue discount.

Form 1099-PATR. Report distributions from cooperatives to their patrons.

Form 1099-R. Report distributions from pensions, annuities, retirement or profit-sharing plans, any individual retirement arrangements (IRAs) (including SEPs, SIMPLEs, Roth IRAs and Coverdell ESAs, Roth conversions and IRA recharacterizations), or insurance contracts.

Form 1099-S. Report gross proceeds from the sale or exchange of real estate transactions.

Also use these returns to report amounts received as a nominee for another person.

Form 2438, Undistributed Capital Gains Tax Return. If the fund designates undistributed capital gains under section 852(b)(3)(D), it must file this return and pay tax on the gains designated by the 30th day after the end of the fund's tax year. In addition, a copy of Form 2438 (with Copy A of all Forms 2439) must be attached to Form 1120-RIC when filed.

Form 2439, Notice to Shareholder of Undistributed Long-Term Capital Gains. If the fund filed Form 2438, it must complete Form 2439 for each shareholder for whom it paid tax on undistributed capital gains and furnish a copy to the shareholder by the 60th day after the end of the fund's tax year.

Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts. Use this form either if the fund received a distribution from a foreign trust or if the fund was the grantor of, transferor to, or transferor of a foreign trust that existed during the tax year. See Question 5, Schedule N (Form 1120).

Form 5452, Corporate Report of Nondividend Distributions.

Form 5471, Information Return of U.S. Persons With Respect to Certain Foreign Corporations. The fund may have to file Form 5471 if it meets any of the following conditions:

It controls a foreign corporation,
It acquires, disposes of, or owns 10% or more in value or vote of the outstanding stock of a foreign corporation, or
It had control of a foreign corporation for an uninterrupted period of at least 30 days during the annual accounting period of the foreign corporation. See Question 4, Schedule N (Form 1120).

Form 5472, Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. This form is filed if the fund is 25% or more foreign-owned. See Question 5, Schedule K, on page 12.

Form 5498, IRA Contribution Information. Use this form to report contributions (including rollover contributions) to any IRA, including a SEP, SIMPLE, or Roth IRA and to report Roth conversions, IRA recharacterizations, and the fair market value of the account.

Form 5498-ESA, Coverdell ESA Contribution Information. Use this form to report contributions (including rollover contributions) and the fair market value of a Coverdell education savings account (ESA).

Form 5498-MSA, Archer MSA or Medicare+Choice MSA Information. Report contributions to an Archer MSA and the fair market value of an Archer MSA or Medicare+Choice MSA.

For more information, see the general and specific Instructions for Forms 1099, 1098, 5498, and W-2G.

Form 5713, International Boycott Report. Funds that had operations in, or related to, certain “boycotting” countries file Form 5713.

Form 8275, Disclosure Statement, and Form 8275-R, Regulation Disclosure Statement. These forms are used to disclose items or positions taken on a tax return that are not otherwise adequately disclosed or that are contrary to Treasury regulations (to avoid parts of the accuracy-related penalty or certain preparer penalties).

Form 8281, Information Return for Publicly Offered Original Issue Discount Instruments. Report the issuance of public offerings of debt instruments (obligations).

Form 8300, Report of Cash Payments Over $10,000 Received in a Trade or Business. Report the receipt of more than $10,000 in cash or foreign currency in one transaction or a series of related transactions.

Form 8613, Return of Excise Tax on Undistributed Income of Regulated Investment Companies. If the fund is liable for the 4% excise tax on undistributed income under section 4982 or makes an election under section 4982(e)(4), it must file this return for the calendar year.

Form 8621, Return by a Shareholder of a Passive Foreign Investment Company or Qualified Electing Fund. Use this form to make certain elections by shareholders in a passive foreign investment company and to figure certain deferred taxes.

Form 8842, Election To Use Different Annualization Periods for Corporate Estimated Tax. Funds use Form 8842 to elect one of the annualization periods in section 6655(e)(2) to figure estimated tax payments under the annualized income installment method.

Form 8865, Return of U.S. Persons With Respect To Certain Foreign Partnerships. A fund may have to file Form 8865 if it:

Controlled a foreign partnership (i.e., owned more than a 50% direct or indirect interest in the partnership).
Owned at least a 10% direct or indirect interest in a foreign partnership while U.S. persons controlled that partnership.
Had an acquisition, disposition, or change in proportional interest in a foreign partnership that:
- Increased its direct interest to at least 10% or reduced its direct interest of at least 10% to less than 10%.
- Changed its direct interest by at least a 10% interest.
Contributed property to a foreign partnership in exchange for a partnership interest if:
- Immediately after the contribution, the fund owned, directly or indirectly, at least a 10% interest in the foreign partnership; or
- The FMV of the property the fund contributed to the foreign partnership in exchange for a partnership interest, when added to other contributions of property made to the foreign partnership during the preceding 12-month period, exceeds $100,000.
Also, the fund may have to file Form 8865 to report certain dispositions by a foreign partnership of property it previously contributed to that foreign partnership if it was a partner at the time of the disposition. For more details, including penalties for failing to file Form 8865, see Form 8865 and its separate instructions.

Form 8886, Reportable Transaction Disclosure Statement. Use this form to disclose information for each reportable transaction in which the RIC participated. Form 8886 must be filed for each tax year that the RIC enters into a reportable transaction. The following are reportable transactions: (a) any transaction the same as or substantially similar to tax avoidance transactions identified by the IRS, (b) any transaction offered under conditions of confidentiality, (c) any transaction for which the RIC has contractual protection against disallowance of the tax benefits, and (d) any transaction resulting in a tax credit of more than $250,000, if the RIC held the asset generating the credit for 45 days or less.

Statements

Stock ownership in foreign corporations. Attach the statement required by section 551(c) if:

The fund owned 5% or more in value of the outstanding stock of a foreign personal holding company and
The fund was required to include in its gross income any undistributed foreign personal holding company income from a foreign personal holding company.

Transfers to a corporation controlled by the transferor. If the fund receives stock of a corporation in exchange for property, and no gain or loss is recognized under section 351, the fund (transferor) and the transferee must each attach to their tax returns the information required by Regulations section 1.351-3.

Safe harbor under Temporary Regulations section 1.67-2T(j)(2). Generally, shareholders in a nonpublicly offered fund that are individuals or pass-through entities are treated as having received a dividend in an amount equal to the shareholder's allocable share of affected RIC expenses for the calendar year. They are also treated as having paid or incurred an expense described in section 212 (and subject to the 2% limitation on miscellaneous itemized deductions) in the same amount for the calendar year.

Election. A nonpublicly offered fund may elect to treat its affected RIC expenses for a calendar year as equal to 40% of the amount determined under Temporary Regulations section 1.67-2T(j)(1)(i) for that calendar year.

To make this election, attach to Form 1120-RIC for the tax year that includes the last day of the calendar year for which the fund makes the election, a statement that it is making an election under Temporary Regulations section 1.67-2T(j)(2). Once made, the election remains in effect for all subsequent calendar years and may not be revoked without IRS consent. See Temporary Regulations section 1.67-2T for definitions and other details.

Notice to shareholders. A fund must notify its shareholders within 60 days after the close of its tax year of the distribution made during the tax year that qualifies for the dividends received deduction under section 243. For purposes of the dividends-received deduction, a capital gain dividend received from a RIC is not treated as a dividend.

Consent to partnership election to close its books monthly. Certain money market funds that obtain an interest in an eligible partnership that invests in assets exempt from taxation under section 103 may be qualified to pay exempt-interest dividends to its shareholders. To qualify for payment of exempt-interest dividends, a fund must meet the quarterly net asset value requirements under section 852(b)(5). To maintain the required net asset value at the end of each quarter, the fund may take into account on a monthly basis its distributive share of partnership items if the eligible partnership makes a proper election to close its books at the end of each month. See Rev. Proc. 2002-16, 2002-9 IRB 572 for details.

Eligibility. A fund is entitled to take into account its distributive share of partnership items on a monthly basis if:

The fund is entitled to hold itself out as a money market fund, or an equivalent of a money market fund.
The fund provides a statement to the partnership that it consents to the partnership's election to close its books monthly and that the fund will include in its taxable income its distributive share of partnership items in a manner consistent with the election. See Rev. Proc. 2002-16 for the required contents of the statement of consent.
The fund provides the statement of consent to the custodian or manager of the partnership by the last day of the second month after the month in which the fund acquires the partnership interest.
The partnership is eligible under Rev. Proc. 2002-16 to make the monthly closing election and the election is effective by the second month after the month in which the fund acquires the partnership interest.

Statement of consent. The consent to a partnership's monthly closing election is effective for the month in which the fund acquires the partnership interest, unless the fund requests that the consent be effective for either of the two immediately following calendar months. In addition to timely providing the partnership with the statement of consent, the statement should be filed with the fund's Form 1120-RIC for the first tax year in which the consent is effective. The monthly closing consent (and the partnership's election) may be revoked only with the consent of the Commissioner. However, the fund's consent becomes ineffective on any day when the fund ceases to be an eligible partner and the partnership's monthly closing election is terminated as of the first day of any month the partnership is no longer eligible for the election under Rev. Proc. 2002-16. Also see Rev. Proc. 2002-16 for transition rules concerning eligibility and effective dates for consents that are requested to become effective during 2002.

Assembling the Return

To ensure that the fund's tax return is correctly processed, attach all schedules and other forms after page 4, Form 1120-RIC, and in the following order.

Schedule N (Form 1120).
Form 4136 and Form 4626.
Additional schedules in alphabetical order.
Additional forms in numerical order.

Complete every applicable entry space on Form 1120-RIC. Do not write “See attached” instead of completing the entry spaces. If more space is needed on the forms or schedules, attach separate sheets, using the same size and format as the printed forms. If there are supporting statements and attachments, arrange them in the same order as the schedules or forms they support and attach them last. Show the totals on the printed forms. Also, be sure to enter the fund's name and EIN on each supporting statement or attachment.

Accounting Methods

An accounting method is a set of rules used to determine when and how income and expenses are reported. Figure taxable income using the method of accounting regularly used in keeping the fund's books and records. Generally, permissible methods include cash, accrual, or any other method authorized by the Internal Revenue Service.

In all cases, the method used must clearly show taxable income. If inventories are required, the accrual method must be used for sales and purchases of merchandise.

Accrual method. Generally, a fund must use the accrual method of accounting if its average annual gross receipts exceed $5 million. See section 448(c).

Under the accrual method, an amount is includible in income when:

All the events have occurred that fix the right to receive the income, which is the earliest of the date (a) the required performance takes place, (b) payment is due, or (c) payment is received and
The amount can be determined with reasonable accuracy.

See Regulations section 1.451-1(a) for details.

Generally, an accrual basis taxpayer can deduct accrued expenses in the tax year when:

All events that determine the liability have occurred,
The amount of the liability can be figured with reasonable accuracy, and
Economic performance takes place with respect to the expense.

There are exceptions to the economic performance rule for certain items, including recurring expenses. See section 461(h) and the related regulations for determining when economic performance takes place.

Mark-to-market accounting method. Generally, dealers in securities must use the mark-to-market accounting method described in section 475. Under this method, any security that is inventory to the dealer must be included in inventory at its fair market value (FMV). Any security held by a dealer that is not inventory and that is held at the close of the tax year is treated as sold at its FMV on the last business day of the tax year. Any gain or loss must be taken into account in determining gross income. The gain or loss taken into account is generally treated as ordinary gain or loss.

For details, including exceptions, see section 475, the related regulations, and Rev. Rul. 94-7, 1994-1 C.B. 151.

Dealers in commodities and traders in securities and commodities may elect to use the mark-to-market accounting method. To make the election, the fund must file a statement describing the election, the first tax year the election is to be effective, and in the case of an election for traders in securities or commodities, the trade or business for which the election is made. Except for new taxpayers, the statement must be filed by the due date (not including extensions) of the income tax return for the tax year immediately preceding the election year and attached to that return, or if applicable, to a request for an extension of time to file that return. For more details, see Rev. Proc. 99-17, 1999-1 C.B. 503, and sections 475(e) and (f).

Change in accounting method. To change its method of accounting used to report taxable income (for income as a whole or for any material item), the fund must file Form 3115, Application for Change in Accounting Method. For more information, see Form 3115 and Pub. 538, Accounting Periods and Methods.

Section 481(a) adjustment. The fund may have to make an adjustment to prevent amounts of income or expenses from being duplicated. This is called a section 481(a) adjustment. The section 481(a) adjustment period is generally 1 year for a net negative adjustment and 4 years for a net positive adjustment. However, a fund may elect to use a 1-year adjustment period if the net section 481(a) adjustment for the change is less than $25,000. The fund must complete the appropriate lines of Form 3115 to make the election.

Include any net positive section 481(a) adjustment on Form 1120-RIC, line 7. If the net section 481(a) adjustment is negative, report it on Form 1120-RIC, line 22.

Accounting Periods

A fund must figure its taxable income on the basis of a tax year. A tax year is the annual accounting period a fund uses to keep its records and report its income and expenses. Funds can use a calendar year or a fiscal year.

For more information about accounting periods, see Regulations section 1.441-1, 1.441-2, and Pub. 538.

Calendar year. If the calendar year is adopted as the annual accounting period, the fund must maintain its books and records and report its income and expenses for the period from January 1 through December 31 of each year.

Fiscal year. A fiscal year is 12 consecutive months ending on the last day of any month except December. A 52-53 week year is a fiscal year that varies from 52 to 53 weeks.

Adoption of tax year. A fund adopts a tax year when it files its first income tax return. It must adopt a tax year by the due date (not including extensions) of its first income tax return.

Change of tax year. Generally, a fund must get the consent of the IRS before changing its tax year by filing Form 1128, Application To Adopt, Change, or Retain a Tax Year. However, under certain conditions, a fund may change its tax year without getting the consent.

For more information on change of tax year, see Form 1128, Regulations section 1.442–1, and Pub. 538.

Rounding Off to Whole Dollars

The fund may round off cents to whole dollars on its return and schedules. If the fund does round to whole dollars, it must round all amounts. To round, drop amounts under 50 cents and increase amounts from 50 cents to 99 cents to the next dollar (for example, $1.39 becomes $1 and $2.50 becomes $3).

If two or more amounts must be added to figure the amount to enter on a line, include cents when adding the amounts and round off only the total.

Recordkeeping

Keep the fund's records for as long as they may be needed for administration of any provision of the Internal Revenue Code. Usually, records that support an item of income, deduction, or credit on the return must be kept for 3 years from the date the return is due or filed, whichever is later. Keep records that verify the fund's basis in property for as long as they are needed to figure the basis of the original or replacement property.

The fund should keep copies of all filed returns. They help in preparing future and amended returns.

Depository Method of Tax Payment

The fund must pay the tax due in full no later than the 15th day of the 3rd month after the end of the tax year. The two methods of depositing income taxes, including capital gains tax, are discussed below.

Electronic Deposit Requirement

The fund must make electronic deposits of all depository taxes (such as employment tax, excise tax, and income tax) using the Electronic Federal Tax Payment System (EFTPS) in 2004 if:

The total deposits of such taxes in 2002 were more than $200,000 or
The fund was required to use EFTPS in 2003.

Depositing on time. If the fund is required to use EFTPS and fails to do so, it may be subject to a 10% penalty. If the fund is not required to use EFTPS, it may participate voluntarily. To enroll in or get more information about EFTPS, call 1-800-555-4477 or 1-800-945-8400. To enroll online, visit www.eftps.gov.

For EFTPS deposits to be made timely, the fund must initiate the transaction at least one business day before the date the deposit is due.

Deposits With Form 8109

If the fund does not use EFTPS, deposit fund income tax payments (and estimated tax payments) with Form 8109, Federal Tax Deposit Coupon. If you do not have a preprinted Form 8109, use Form 8109-B to make deposits. You can get this form by calling 1-800-829-4933. Be sure to have your EIN ready when you call.

Do not send deposits directly to an IRS office; otherwise, the fund may have to pay a penalty. Mail or deliver the completed Form 8109 with the payment to an authorized depositary (i.e., a commercial bank or other financial institution authorized to accept Federal tax deposits). Make checks or money orders payable to the depositary.

If the fund prefers, it may mail the coupon and payment to Financial Agent, Federal Tax Deposit Processing, P.O. Box 970030, St. Louis, MO 63197. Make the check or money order payable to “Financial Agent.”

To help ensure proper crediting, write the fund's EIN, the tax period to which the deposit applies, and “Form 1120-RIC” on the check or money order. Be sure to darken the “1120” box on the coupon. Records of these deposits will be sent to the IRS.

For more information on deposits, see the instructions in the coupon booklet (Form 8109) and Pub. 583, Starting a Business and Keeping Records.

If the fund owes tax when it files Form 1120-RIC, do not include the payment with the tax return. Instead, mail or deliver the payment with Form 8109 to an authorized depositary or use EFTPS, if applicable.

Estimated Tax Payments

Generally, the following rules apply to the fund's payments of estimated tax.

The fund must make installment payments of estimated tax if it expects its total tax for the year (less applicable credits) to be $500 or more. For estimated tax purposes, the estimated tax of the fund is defined as its alternative minimum tax less the credit for Federal tax on fuels.
The installments are due by the 15th day of the 4th, 6th, 9th, and 12th months of the tax year. If any date falls on a Saturday, Sunday, or legal holiday, the installment is due on the next regular business day.
Use Form 1120-W, Estimated Tax for Corporations, as a worksheet to compute estimated tax.
If the fund does not use EFTPS, use the deposit coupons (Forms 8109) to make deposits of estimated tax.

For more information on estimated tax payments, including penalties that apply if the fund fails to make required payments, see the instructions for line 29 on page 9.

Overpaid estimated tax. If the fund overpaid estimated tax, it may be able to get a quick refund by filing Form 4466, Corporation Application for Quick Refund of Overpayment of Estimated Tax. The overpayment must be at least 10% of the expected income tax liability and at least $500. To apply for a quick refund, file Form 4466 before the 16th day of the 3rd month after the end of the tax year, but before the fund files its income tax return. Do not file Form 4466 before the end of the fund's tax year.

Interest and Penalties

Interest. Interest is charged on taxes paid late even if an extension of time to file is granted. Interest is also charged on penalties imposed for failure to file, negligence, fraud, substantial valuation misstatements, and substantial understatements of tax from the due date (including extensions) to the date of payment. The interest charge is figured at a rate determined under section 6621.

Penalty for late filing of return. A fund that does not file its tax return by the due date, including extensions, may be penalized 5% of the unpaid tax for each month or part of a month the return is late, up to a maximum of 25% of the unpaid tax. The minimum penalty for a return that is over 60 days late is the smaller of the tax due or $100. The penalty will not be imposed if the fund can show that the failure to file on time was due to reasonable cause. Funds that file late must attach a statement explaining the reasonable cause.

Penalty for late payment of tax. A fund that does not pay the tax when due generally may be penalized ½ of 1% of the unpaid tax for each month or part of a month the tax is not paid, up to a maximum of 25% of the unpaid tax. The penalty will not be imposed if the fund can show that the failure to pay on time was due to reasonable cause.

Trust fund recovery penalty. This penalty may apply if certain income, social security, and Medicare taxes that must be collected or withheld are not collected or withheld, or these taxes are not paid. These taxes are generally reported on Forms 941 or 945 (see Other Forms and Statements That May Be Required on page 2). The trust fund recovery penalty may be imposed on all persons who are determined by the IRS to have been responsible for collecting, accounting for, and paying over these taxes, and who acted willfully in not doing so. The penalty is equal to the unpaid trust fund tax. See the instructions for Pub. 15 (Circular E), Employer's Tax Guide, for more details, including the definition of responsible person.

Other penalties. Other penalties can be imposed for negligence, substantial understatement of tax, and fraud. See sections 6662 and 6663.

General Instructions