1. RICS, PARTNERSHIPS, AND THE SEPARATE ACCOUNT DIVIDENDS-RECEIVED DEDUCTION ABA Section of Taxation 2016 Midyear Meeting 1 January 29, 2016

2. Disadvantages of the RIC structure Advantages of the partnership alternative Applying for PLRs 2 Summary

3. Expenses of the RIC have to be subtracted from the amount reported as dividends to shareholders. See the Example in Treas. Regs. §1.854-1(c)(3). Simplified example: Dividends received by the RIC $ 70,000 (other than capital gains dividends) Subtract expenses of the RIC– 20,000 Taxable income of the RIC$ 50,000 (distributable as dividends to shareholders) 3 Disadvantages of the RIC structure – 1 This reduces the shareholder’s dividends-received deduction (DRD), for two reasons – the dividends actually received are themselves reduced, and so is the “company share” percentage.

4. RICs present added challenges and expenses for internal accountants and external auditors – e.g., TIPS deflation adjustments Proper classification of swap, option, and futures transactions as Code §988 or §1256 contracts Straddle analyses Adjustments for defaulted securities ROCSOP adjustments Classification of capital loss carryovers pursuant to the Post-RIC Modernization Act. 4 Disadvantages of the RIC structure – 2 As RIC investments grow more complex – e.g., more sophisticated securities and derivatives – these challenges and expenses only increase. Moreover, errors can easily lead to incorrect accounting results, or federal tax liabilities, or both.

5. The expenses of the partnership don’t have to be subtracted from the amount reported as dividends to partners. See CCA 201603023 (July 17, 2015), citing Code §§702(a)(5), 702(b), and Treas. Regs. §1.701-2(d), Ex. 5. Simplified example: Dividends received by the partnership$ 70,000 (that qualify for DRD treatment) No subtraction of expenses of the partnership– 0 Partners’ distributive share of dividends$ 70,000 5 Advantages of the partnership alternative – 1 In the year after converting dividend-receiving RICs to partnerships, the dividends received by the partners increased substantially, as did the “company share” percentage.

6. The complex RIC income, distribution, and notice requirements no longer apply. Therefore, The adjustments, classifications, and analyses on slide 4 become either entirely unnecessary, or no longer need to appear in annual reports. This facilitates briefer, less expensive audits. There is no longer any need to prepare and file the five tax reporting forms previously required for each RIC to make consent dividends. Nor any need for extensive compliance work – both by internal tax specialists and external tax auditors – in order to validate the satisfaction of the RIC requirements. Finally, potential liability for failing to satisfy any of the RIC requirements is eliminated. 6 Advantages of the partnership alternative – 2 These simplifications substantially reduced fund administration fees, as well as external audit and tax fees. The savings from reduced levels of internal work were also substantial.

7. 2006: Original applications requested rulings that: Each fund would be classified as a partnership as of the date of its election to be so classified, as long as it had two or more members and made no later, contrary election. As of the date of its election, each fund would not be treated as a publicly traded partnership taxable as a corporation, as described in Code §7704. 2014: Responding to new applications, the Service asked only for further representations on “investor control.” 2015: Responding to most recent application, the Service decided not to rule, having concluded that the issue fell within their “no-rule” policy, as announced in Rev. Proc. 2015-3, I.R.B. 2015-1 (Jan. 2, 2015). 7 Applying for PLRs