SECTION 2. BACKGROUND

.01 Certain RICs seek investments with a yield that is treated for federal income tax purposes as interest exempt from tax under § 103 and that reflects current shortterm exempt interest rates. Partnerships described in Rev. Proc. 2002–68, 2002–43 I.R.B. 753, modifying and superseding Rev. Proc. 2002–16, 2002–1 C.B. 572, offer these advantages to some of their partners. The partnership interests are referred to as synthetic tax-exempt variable-rate bonds. Eligible partnerships described in Rev. Proc. 2002–68 may elect a monthly closing election that permits consenting partners to take into account their distributive shares of partnership income on a monthly basis.

.02 Partners in eligible partnerships described in Rev. Proc. 2002–68 that are RICs must qualify as RICs under § 851(b)(3) and generally also seek to qualify to pay exempt-interest dividends under § 852(b)(5).

.03 Section 851(b)(3)(A) requires that, in order for a corporation to qualify as a RIC, at the close of each quarter of the taxable year, at least 50 percent of the value of the corporation’s total assets must be represented by cash and cash items (including receivables), Government securities, securities of other RICs, and other securities generally limited in respect of any one issuer to an amount not greater in value than 5 percent of the value of the total assets of the corporation and to not more than 10 percent of the outstanding voting securities of such issuer.

.04 Section 851(b)(3)(B) provides that, in order for a corporation to qualify as a RIC, not more than 25 percent of the corporation’s total assets may be invested in

the securities (other than Government securities and the securities of other RICs) of any one issuer, or of two or more issuers that the corporation controls and that are determined, under regulations, to be engaged in the same or similar trades or businesses or related trades or businesses.

.05 Section 852(b)(5) provides that, if at least 50 percent of the value (as defined in § 851(c)(4)) of a RIC’s total assets at the close of each calendar quarter consists of obligations described in § 103(a), the RIC is eligible to pay exempt-interest dividends, which are treated by the RIC’s shareholders as interest excludable from gross income under § 103(a).