§ 1.851-5 Examples.
(a) Examples. The provisions of section 851 may be illustrated by the following examples:
Example 1.
|
Percent
|
| Cash |
5
|
| Government securities |
10
|
| Securities of regulated investment companies |
20
|
| Securities of Corporation A |
10
|
| Securities of Corporation B |
15
|
| Securities of Corporation C |
20
|
| Securities of various corporations (not exceeding 5 percent of its assets in any one company) |
20
|
| Total |
100 |
(ii) Investment Company W owns all of
the voting
stock of
Corporations A and B, 15 percent of
the voting
stock of
Corporation C, and less than 10 percent of
the voting
stock of
regulated investment companies and various
other corporations. Neither
Corporation A nor
Corporation B owns:
(A) 20 percent or more of the voting stock of any other corporation;
(B) Securities issued by Corporation C; or
(C) Securities issued by any of the regulated investment companies or various corporations whose securities are owned by Investment Company W. Except for Corporation A and Corporation B, none of the corporations (including the regulated investment companies) is a member of a controlled group with Investment Company W.
(iii) Investment Company W meets the requirements under section 851(b)(3) at the end of its first quarter. It complies with subparagraph (A) of section 851(b)(3) because it has 55 percent of its assets invested as provided in that subparagraph. It complies with subparagraph (B) of section 851(b)(3) because it does not have more than 25 percent of its assets invested in the securities of any one issuer, of two or more issuers that it controls, or of one or more qualified publicly traded partnerships (as defined in section 851(h)).
Example 2.
(i) Investment Company V at the close of a particular quarter of the taxable year has its assets invested as follows:
|
Percent
|
| Cash |
10
|
| Government securities |
35
|
| Securities of Corporation A |
7
|
| Securities of Corporation B |
12
|
| Securities of Corporation C |
15
|
| Securities of Corporation D |
21
|
| Total |
100 |
(ii) Investment Company V fails to meet
the requirements of subparagraph (A) of section 851(b)(3) since its assets invested in
Corporations A, B, C, and D exceed in each case 5 percent of
the value of
the total assets of
the company at
the close of
the particular
quarter.
Example 3.
(i) Investment Company X at the close of a particular quarter of the taxable year has its assets invested as follows:
|
Percent
|
| Cash and Government securities |
20
|
| Securities of Corporation A |
5
|
| Securities of Corporation B |
10
|
| Securities of Corporation C |
25
|
| Securities of various corporations (not exceeding 5 percent of its assets in any one company) |
40
|
| Total |
100 |
(ii) Investment Company X owns
more than 20 percent of
the voting power of
Corporations B and C and less than 10 percent of
the voting power of all of
the other corporations.
Corporation B manufactures radios and
Corporation C
acts as its
distributor and also distributes radios for
other companies.
Investment Company X fails to meet
the requirements of subparagraph (B) of section 851(b)(3) since it has 35 percent of its assets invested in
the securities of
two issuers which it
controls and which are engaged in
related trades or
businesses.
Example 4.
(i) Investment Company Y at the close of a particular quarter of its taxable year has its assets invested as follows:
|
Percent
|
| Cash and Government securities |
15
|
| Securities of Corporation K (a regulated investment company) |
30
|
| Securities of Corporation A |
10
|
| Securities of Corporation B |
20
|
| Securities of various corporations (not exceeding 5 percent of its assets in any one company) |
25
|
| Total |
100 |
(ii) Corporation K has 20 percent of its assets invested in Corporation L, and Corporation L has 40 percent of its assets invested in Corporation B. Corporation A also has 30 percent of its assets invested in Corporation B. Investment Company Y owns more than 20 percent of the voting power of Corporations A and K. Corporation K owns more than 20 percent of the voting power of Corporation L.
(iii) At the end of that quarter, Investment Company Y is disqualified under subparagraph (B)(i) of section 851(b)(3) because, after applying section 851(c)(1), more than 25 percent of the value of Investment Company Y's total assets is invested in the securities of Corporation B. This result is shown by the following calculation:
|
Percent
|
| Percentage of assets invested directly in Corporation B |
20.0
|
| Percentage invested indirectly through K and L (30% × 20% × 40%) |
2.4
|
| Percentage invested indirectly through A (10% × 30%) |
3.0
|
| Total percentage of assets of Investment Company Y invested in Corporation B |
25.4 |
Example 5.
Investment Company Z, which keeps its
books and makes its returns on
the basis of
the calendar year, at
the close of
the first
quarter of 2016 meets
the requirements of section 851(b)(3) and has 20 percent of its assets invested in
Corporation A. Later during
the taxable year it makes distributions to its
shareholders and because of such
distributions, it finds at
the close of
the taxable year that it has
more than 25 percent of its remaining assets invested in
Corporation A.
Investment Company Z does not lose its status as a
regulated investment company for
the taxable year 2016 because of such
distributions, nor will it lose its status as a
regulated investment company for any
subsequent year solely as a
result of such
distributions.
See section 851(d)(1).
Example 6.
Investment Company Q, which keeps its
books and makes its returns on
the basis of
the calendar year, at
the close of
the first
quarter of 2016 meets
the requirements of section 851(b)(3) and has 20 percent of its assets invested in
Corporation P. At
the close of
the taxable year 2016, it finds that it has
more than 25 percent of its assets invested in
Corporation P. This situation
results entirely from fluctuations in
the market
values of
the securities in
Investment Company Q's portfolio and is not due in whole or in part to
the acquisition of any
security or
other property.
Investment Company Q does not lose its status as a
regulated investment company for
the taxable year 2016 because of such fluctuations in
the market
values of
the securities in its portfolio, nor will it lose its status as a
regulated investment company for any
subsequent year solely as a
result of such market
value fluctuations.
See section 851(d)(1).
Example 7.
(i) Investment Company T at the close of a particular quarter of its taxable year has its assets invested as follows:
|
Percent
|
| Cash and Government securities |
40
|
| Securities of Corporation A |
20
|
| Securities of various qualified publicly traded partnerships (within the meaning of sections 851(b)(3) and 851(h)) |
15
|
| Securities of various corporations (not exceeding 5 percent of its assets in any one company) |
25
|
| Total |
100 |
(ii) Investment Company T owns more than 20 percent of the voting power of Corporation A and less than 10 percent of the voting power of all of the other corporations. Corporation A has 80 percent of its assets invested in qualified publicly traded partnerships.
(iii) Investment Company T is disqualified under subparagraph (B)(iii) of section 851(b)(3), because, after applying section 851(c)(1), more than 25 percent of the value of Investment Company T's total assets is invested in the securities of one or more qualified publicly traded partnerships. This result is shown by the following calculation:
|
Percent
|
| Percentage of assets invested directly in qualified publicly traded partnerships |
15.0
|
| Percentage invested in qualified publicly traded partnerships indirectly through A (20% × 80%) |
16.0
|
| Total percentage of assets of Investment Company T invested in qualified publicly traded partnerships |
31.0 |
(b) Effective/applicability dates. The rules of this section apply to quarters that begin on or after December 14, 2015. For purposes of applying the first sentence of section 851(d)(1) to a quarter that begins on or after March 14, 2016, the rules of this section apply in determining whether the taxpayer met the requirements of section 851(b)(3) and (c) at the close of prior quarters.
