Treasury and the IRS recently issued final regulations (T.D. 9737) under Section 851(c), which relates to regulated investment company (RIC) controlled group rules. The regulations amend Treas. Reg. Secs. 1.851-3 and 1.851-5.
The final regulations revise existing examples to clarify that as few as two corporations are enough to constitute a controlled group under the Section 851(c)(3) rules. Some practitioners were initially concerned that Section 851(c)(3) could be interpreted as requiring the presence of at least two levels of controlled entities for a controlled group to exist.
The existence or absence of a RIC controlled group is important when evaluating the RIC diversification rules. The final regulations include revised examples that apply to so-called "fund of funds" structures in which a RIC (Upper RIC) may invest in a subsidiary RIC (Lower RIC). Commenters to the proposed regulations noted uncertainty that existed when determining whether an Upper RIC satisfies the diversification rules under Section 851(b).
Treasury and the IRS issued Rev. Proc. 2015-45 concurrently with the final regulations to provide guidance around this issue. The revenue procedure provides procedures to lessen the burden of demonstrating compliance with the diversification rules, applying the relief provision of Section 851(d)(1), and dealing with different quarter-end testing dates.
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