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TITLE 26-INTERNAL REVENUE CODE PART I-REGULATED INVESTMENT COMPANIES Sec. 851. Definition of regulated investment company. 852. Taxation of regulated investment companies and their shareholders. 853. Foreign tax credit allowed to shareholders. 854. Limitations applicable to dividends received from regulated investment company. 855. Dividends paiz by regulated investment company after close of taxable year. AMENDMENTS 1960-Pub. L. 86-779, § 10(b)(1), Sept. 14, 1960, 74 Stat. 1008, added "and Real Estate Investment Trusts" to the Subchapter M heading, Part I and Part II desig- nations thereunder and Part I designation preceding table of sections numbered 851 to 855. PAnT REFERRED TO IN OTHER SECTIONS This part is referred to in section 58 of this title. § 851. Definition of regulated investment company (a) General rule For purposes of this subtitle, the term "regu- lated investment company" means any domes- tic corporation (other than a personal holding company as defined in section 542)- (1) whlch, at all times during the taxable year, is registered under the Investment Com- pany Act of 1940, as amended (15 U.S.C. 80a-1 to 80b-2) either as a management company or as a unit investment trust, or (2) which is a common trust fund or similar fund excluded by section 3(c)(3) of such Act (15 U.S.C. 80a-3(c)) from the definition of "investment company" and is not included in the definition of "common trust fund" by sec- tion 584(a). (b) Limitations A corporation shall not be considered a regu- lated investment company for any taxable year unless- (1) it files with its return for the taxable year an election to be a regulated investment company or has made such election for a pre- vious taxable year; (2) at least 90 percent of its gross income is derived from dividends, interests, and gains from the sale or other disposition of stock or securities; (3) less than 30 percent of its gross income is derived from the sale or other disposition of stock or securities held for less than 3 months; and (4) at the close of each quarter of the tax- able year- (A) at least 50 percent of the value of its total assets is represented by- (I) cash and cash items (including re- ceivables), Government securities and se- curities of other regulated investment companies, and (ii) other securities for purposes of this calculation limited, except and to the extent provided in subsection (e), in re- spect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the taxpayer and to not more than 10 percent of the outstanding voting securities of such issuer, and (B) not more than 25 percent of the value of its total assets is invested in the securi- ties (other than Government securities or the securities of other regulated investment companies) of any one issuer, or of two or more issuers which the taxpayer controls and which are determined, under regula- tions prescribed by the Secretary; to be en- gaged in the same or similar trades or busi- nesses or related trades or businesses. For purposes of paragraph (2), there shall be treated as dividends amounts included in gross income under section 951(a)(1)(A)(i) for the taxable year to the extent that, under section 959(a)(1), there is a distribution out of the earnings and profits of the taxable year which are attributable to the amounts so included. (c) 'ules applicable to subsection (b)(4) For purposes of subsection (b)(4) and this subsection- (1) In ascertaining the value of the taxpay- er's investment in the securities of an issuer, for the purposes of subparagraph (B), there shall be included its proper proportion of the investment of any other corporation, a member of a controlled group, in the securi- ties of such issuer, as determined under regu- lations prescribed by the Secretary. (2) The term "controls" means the owner- ship in a corporation of 20 percent or more of the total combined voting power of all classes of stock entitled to vote. (3) The term "controlled group" means one or more chains of corporations connected through stock ownership with the taxpayer if- (A) 20 percent or more of the total com- bined voting power of all classes of stock en- titled to vote of each of the corporations (except the taxpayer) is owned directly by one or more of the other corporations, and (B) the taxpayer owns directly 20 percent or more of the total combined voting power of all classes of stock entitled to vote, of at least one of the other corporations. (4) The term "value" means, with respect to securities (other than those of majority- owned subsidiaries) for which market quota- tions are readily available, the market value of such securities; and with respect to other securities and assets, fair value as determined in good faith by the board of directors, except that in the case of securities of majority- owned subsidiaries which are investment com- panies such fair value shall riot exceed market value or asset value, whichever is higher. (5) All other terms shall have the same meaning as when used in the Investment Company Act of 1940, as amendd. (d) Determination of status A corporation which meets the requirements of subsections (b)(4) and (c) at the close of any quarter shall not lose its status as a regulated investment company because of a discrepancy during a subsequent quarter between the value of its various investments and such require- ments unless such discrepancy exists immedi- ately after the acquisition of any security or other property and is wholly or partly the result of such acquisition. A corporation which Page 536