Special industries: safe-harbor lookthrough treatment for RIC investments in PPIPs.

• Author: Munro, Alan
• Position: Regulated investment companies, public-private investment partnerships

In Rev. Proc. 2009-42, the IRS has outlined a safe harbor for regulated investment companies (RICs) for purposes of the Sec. 851(b)(3) asset diversification tests that treats a RIC as if it directly invested in the assets held by a public-private investment partnership (PPIP) in which it invests.

As part of the Troubled Asset Relief Program (TARP), Treasury partners with private investors to form PPIPs. The PPIPs acquire "legacy securities," which are certain commercial mortgage-backed securities and nonagency (i.e., not securitized by Fannie Mae, Freddie Mac, or Ginnie Mae) residential mortgage securities issued before 2009 and rated AAA at origination.

For a domestic corporation to be taxed as a RIC, it must meet certain requirements, including asset diversification, at the close of each quarter (Sec. 851(b)). Under Sec. 851(b)(3)(A), at least 50% of the total RIC assets must be represented by cash and cash items, U.S. government securities, securities of other RICs, and certain other securities. The value of those other securities must not exceed 5% of the RIC assets per issuer and consist of no more than 10% of the outstanding voting securities of the issuer. Under Sec. 851(b)(3)(B), no more than 25% of the RICs total assets may be invested in the securities of any one issuer. The IRS will in some situations treat a RIC that invests in certain partnerships as if it had directly invested in the assets held by the partnership for purposes of the asset diversification tests.

Rev. Proc. 2009-42 applies to a RIC that invests at least 70% of its original assets (including seed capital and net proceeds from an initial public...