Rev. Rul. 68-442

Advice has been requested as to the Federal income tax treatment of a regulated investment company and its shareholders with respect to distributions under the circumstances described below.

The taxpayer, an investment company, is a domestic corporation which, at all times during the taxable year, was registered under the Investment Company Act of 1940, as amended, 15 U.S.C. 80a-1-80b-2, as a management closed-end diversified company.

The investment company has two classes of shares (namely, income shares and capital shares) which have a par value of 13x dollars and 10x dollars, respectively. The public offering price per share of each class was 15x dollars. The capitalization of the investment company consists of 15,000,000 shares of each class authorized. All such shares were fully paid for in cash when issued and are nonassessable. Neither class of shareholders has pre-emptive rights.

The objective of the investment company is growth of capital and income. The investment company intends to invest up to 100 percent of the value of its total assets in common stocks or securities convertible into common stock.

The investment company commenced operations with one-half of its funds provided by sale of income shares and one-half by sale of capital shares. Holders of income shares will receive all of the income from the initial investment portfolio since all net income from portfolio investment will be paid out as dividends to them. Holders of capital shares will obtain the benefits of all of the capital appreciation on the initial investment portfolio since all capital gains will be allocated to them.

The taxpayer may elect the tax treatment available to regulated investment companies, provided it complies with all the requirements of sections 851 through 855 of the Internal Revenue Code of 1954 and the regulations thereunder. Distribution of 90 percent of the investment company taxable income, including when necessary distributions of net short-term capital gains, will satisfy the requirements of section 852(a)(1) of the Code.

Such a regulated investment company is entitled to dividend paid deductions under section 852 of the Code with respect to (1) distributions of its investment company taxable income to holders of the income shares, and (2) amounts of undistributed capital gains designated as capital gain dividends to holders of the capital shares.

Furthermore, the dividends paid with respect to the income shares and those paid out of net short-term capital gains with respect to the capital shares qualify for the $100 dividends received exclusion available to individuals pursuant to section 116 of the Code and the 85 percent deduction for dividends received by corporations as provided in section 243 of the Code, subject to the limitations under section 854 of the Code.

In addition, the net long-term capital gains of the investment company that are designated and treated as capital gain dividends are taxable only to the holders of the capital shares in accordance with the provisions of section 852(b)(3) of the Code.