The provisions of section 851 may be illustrated by the following examples:
Example 1. Investment Company W at the close of its first quarter of the taxable year has its assets invested as follows:
Percent
Cash......................................................... 5Government securities........................................ 10Securities of regulated investment companies................. 20Securities of Corporation A.................................. 10Securities of Corporation B.................................. 15
Securities of Corporation C.................................. 20Securities of various corporations (not exceeding 5 percent 20
of its assets in any one company)...........................
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Total....................................................... 100
Investment Company W owns all of the voting stock of Corporations A and B, 15 percent of the voting stock of Corporation C, and less than 10 percent of the voting stock of the other corporations. None of the corporations is a member of a controlled group. Investment Company W meets the requirements under section 851(b)(4) at the end of its first quarter. It complies with subparagraph (A) of section 851(b)(4) since it has 55 percent of its assets invested as provided in such subparagraph. It complies with subparagraph (B) of section 851(b)(4) since it does not have more than 25 percent of its assets invested in the securities of any one issuer, or of two or more issuers which it controls.
Example 2. Investment Company V at the close of a particular quarter of the taxable year has its assets invested as follows:
Percent
Cash......................................................... 10Government securities........................................ 35Securities of Corporation A.................................. 7Securities of Corporation B.................................. 12Securities of Corporation C.................................. 15Securities of Corporation D.................................. 21
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Total....................................................... 100
Investment Company V fails to meet the requirements of subparagraph (A) of section 851(b)(4) since its assets invested in Corporations A, B, C, and D exceed in each case 5 percent of the value of the total assets of the company at the close of the particular quarter.
Example 3. Investment Company X at the close of the particular quarter of the taxable year has its assets invested as follows:
Percent
Cash and Government securities............................... 20Securities of Corporation A.................................. 5Securities of Corporation B.................................. 10Securities of Corporation C.................................. 25Securities of various corporations (not exceeding 5 percent 40
of its assets in any one company)...........................
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Total....................................................... 100
Investment Company X owns more than 20 percent of the voting power of Corporations B and C and less than 10 percent of the voting power of all of the other corporations. Corporation B manufactures radios and Corporation C acts as its distributor and also distributes radios for other companies. Investment Company X fails to meet the requirements of subparagraph (B) of section 851(b)(4) since it has 35 percent of its assets invested in the securities of two issuers which it controls and which are engaged in related trades or businesses.
Example 4. Investment Company Y at the close of a particular quarter of the taxable year has its assets invested as follows:
Percent
Cash and Government securities............................... 15Securities of Corporation K (a regulated investment company). 30Securities of Corporation A.................................. 10Securities of Corporation B.................................. 20Securities of various corporations (not exceeding 5 percent 25
of its assets in any one company)...........................
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Total....................................................... 100
Corporation K has 20 percent of its assets invested in Corporation L and Corporation L has 40 percent of its assets invested in Corporation B. Corporation A also has 30 percent of its assets invested in Corporation B, and owns more than 20 percent of the voting power in Corporation B. Investment Company Y owns more than 20 percent of the voting power of Corporations A and K. Corporation K owns more than 20 percent of the voting power of Corporation L, and Corporation L owns more than 20 percent of the voting power of Corporation L. Investment Company Y is disqualified under subparagraph (B) of section 851(b)(4) since more than 25 percent of its assets are considered invested in Corporation B as shown by the following calculation:
Percent
Percentage of assets invested directly in Corporation B...... 20.0Percentage invested through the controlled group, Y-K-L-B (40 2.4
percent of 20 percent of 30 percent)........................Percentage invested in the controlled group, Y-A-B (30 3.0
percent of 10 percent)......................................
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Total percentage of assets of investment Company Y 25.4
invested in Corporation B...............................
Example 5. Investment Company Z, which keeps its books and makes its returns on the basis of the calendar year, at the close of the first quarter of 1955 meets the requirements of section 851(b)(4) and has 20 percent of its assets invested in Corporation A. Later during the taxable year it makes distributions to its shareholders and because of such distributions it finds at the close of the taxable year that it has more than 25 percent of its remaining assets invested in Corporation A. Investment Company Z does not lose its status as a regulated investment company for the taxable year 1955 because of such distributions, nor will it lose its status as a regulated investment company for 1956 or any subsequent year solely as a result of such distributions.
Example 6. Investment Company Q, which keeps its books and makes its returns on the basis of a calendar year, at the close of the first quarter of 1955, meets the requirements of section 851(b)(4) and has 20 percent of its assets invested in Corporation P. At the close of the taxable year 1955, it finds that it has more than 25 percent of its assets invested in Corporation P. This situation results entirely from fluctuations in the market values of the securities in Investment Company Q's portfolio and is not due in whole or in part to the acquisition of any security or other property. Corporation Q does not lose its status as a regulated investment company for the taxable year 1955 because of such fluctuations in the market values of the securities in its portfolio, nor will it lose its status as a regulated investment company for 1956 or any subsequent year solely as a result of such market value fluctuations.