SECTION 7. BIFURCATION

ADJUSTMENT

The bifurcation adjustment described in section 6 of Notice 97–64 continues to apply in certain circumstances. The criteria for the application of the bifurcation adjustment described below reflect that the RIC Modernization Act eliminated the mandatory deferral adjustment, as described above in section 6, and broadened the scope of elective deferral under § 852(b)(8), as described above in section 2.

Unless a RIC is excepted from the requirements of § 4982 for the taxable year under § 4982(f), the RIC must make the

bifurcation adjustment described below for a taxable year if—

(1) The taxable year of the RIC is not

the period used to determine capital gain net income for purposes of the excise tax imposed by § 4982; ⁶

(2) For the pre-November portion of

the taxable year, the RIC has a net capital gain; (3) For the post-October portion of the

taxable year, the RIC has a net loss in one or more rate groups that would cause pre-November net capital gain to be recharacterized (because the RIC would have less capital gain in a rate group for its full taxable year than for the preNovember portion of that year); and (4) The RIC does not have a post October capital loss the deferral of which, in whole or in part, under § 852(b)(8)(A), would prevent recharacterization of the RIC’s preNovember gain.

If a RIC is required to make a bifurcation adjustment, then, for all federal tax purposes, it must net its capital gains and losses as if the pre-November and postOctober portions of its taxable year were separate taxable periods. The RIC must calculate its maximum distributable gain in each rate group separately for the preNovember and post-October portions of its year. The maximum distributable gain in each rate group for the taxable year is the sum of the maximum distributable amounts determined for the two portions of the year.