SECTION 8. EXAMPLE

The following example illustrates the application of section 7 of this notice:

RIC X’s taxable year ends on July 31. X has only the following capital gains and losses for the periods indicated:

6A RIC’s taxable year coincides with the period for determining capital gain net income for purposes of the excise tax if either: (i) the RIC’s taxable year ends with the month of October, or (ii) the RIC’s taxable year ends with the month of November or December and the RIC has made the election under § 4982(e)(4).

Bulletin No. 2015–24 1061 June 15, 2015

8/1/2015 to 10/31/2015 Net gain / (loss)

Long-term capital gain or loss

20-percent group $100

25-percent group

28-percent group

Short-term capital gain or loss

11/1/2015 to 7/31/2016

Long-term capital gain or loss

20-percent group ($100)

25-percent group

28-percent group $150

Short-term capital gain or loss ($50)

For the post-October portion of its taxable year, X has a net short-term capital loss of $50 and no net capital loss or net longterm capital loss. Therefore, under § 852(b)(8)(C), X has a post-October capital loss, which is the $50 net short-term capital loss. Under § 852(b)(8)(A), X may elect to treat any portion of that loss as arising on the first day of the following taxable year for federal income tax purposes.

X has a taxable year that is not the period used to determine its capital gain net income for purposes of § 4982. X has net capital gain for the portion of its taxable year before November 1 (all of which is in the 20-percent group). X also has a loss in the 20-percent group for the portion of its taxable year after October 31. But for the bifurcation adjustment, that post-October loss would cause recharacterization of pre-November gain because that post-October loss would cause X to have more gain in the 20-percent group for the pre-November portion of its taxable year ($100) than for its full taxable year ($0). More specifically, if X’s gains and losses were netted for X’s full taxable year, X’s $100 of gain in the 20-percent group for the pre-November portion of the year would be offset by the $100 loss in the 20-percent group, with only gain in the 28-percent group remaining. X does not have a post-October capital loss the deferral of which would prevent such recharacterization, because whether or not X elects to defer its post-October capital loss (the $50 short-term loss), the loss in the 20-percent group for the post-October portion would offset the gain in that rate

group for the pre-November portion. Therefore, regardless of whether X elects to defer any portion of its post-October capital loss, X must make a bifurcation adjustment.

For the pre-November portion of its taxable year, X has $100 of net capital gain all of which is in the 20-percent group. For the post-October portion, if X elects to defer its entire post-October capital loss, X has $50 of net capital gain, all of which is in the 28-percent group. Because X’s taxable year is bifurcated, the $100 of loss in the 20-percent group in the post-October portion is netted with $100 of the $150 of gain in the 28-percent group in the post-October portion, and not with the $100 of gain in the 20-percent group in the pre-November portion. Therefore, X may report (or designate) up to $150 as capital gain dividends (or undistributed capital gains) with respect to its taxable year ending on July 31, 2016. If X reports the entire amount as capital gain dividends, X must report $100 as 20% rate gain distributions and $50 as 28% rate gain distributions. Because X elected to defer its entire post-October capital loss, X must treat the short-term capital gains and losses constituting the $50 postOctober short-term capital loss as arising on August 1, 2016 (the first day of the next taxable year).