7928 / What are the income distribution requirements that apply to a RIC?

In order to qualify for the special provisions that apply to RICs, a RIC is required to distribute at least (1) 90 percent of its investment company income (which is, essentially, its ordinary income) for the year¹ and (2) 90 percent of the excess of its tax-exempt interest income over certain expenses that are allocable to that income (including expenses disallowed by IRC Section 265 (on expenses and income relating to tax-exempt income)) and deductions for amortizable bond premium that are disallowed by IRC Section 171(a)(2).²

Further, the RIC (1) must have been taxable as a RIC for all years ending on or after November 8, 1983, or (2) as of the close of the taxable year, the RIC may have no earnings and profits accumulated in any taxable year in which it was not taxed as a RIC.³

In order to satisfy the distribution requirements, rather than actually distributing dividends to shareholders, the RIC may elect to credit the accounts of shareholders pursuant to a reinvestment agreement, so long as the shareholders have an unqualified right to withdraw their dividends at any time.⁴ The RIC may also distribute the dividends to a trustee acting on behalf of the RIC shareholders in order to satisfy the income distribution requirements.⁵

Dividends declared and payable to shareholders in October, November or December of any calendar year are treated as though they are paid on December 31 of the calendar year, even if they are paid in January of the following year.⁶