Short Answer
The two class preferred stock/common stock type equity structure described in the question is not allowed in an entity taxed as a regulated investment company under Subchapter M of the Internal Revenue Code of the United States. So the question posed does not arise.
Long Answer
Regulated investment company taxation treatment is governed primarily by Subchapter M, Part I of the Internal Revenue Code §§ 851-855, and to a lesser extent by some referenced sections of Title 15 of the United States Code and by other parts of the Internal Revenue Code of the United States (i.e. Title 26, United States Code). The rules were significantly modified by the “Regulated Investment Company Modernization Act of 2010,” enacted on December 22, 2010 (“RIC Mod Act”), which generally loosened previous requirements in the act, but kept the same basic concepts in place.
To oversimplify, the taxation of a regulated investment company (RIC) starts from the premise of the C-corporation where all income of the RIC is taxed as corporate rates at the corporate level. But, it gets a deduction for dividends paid to investors, which are typically essentially all of its taxable income.
The dividends paid are ordinary income to the investors when they are received by the investors, unless the distribution is eligible for the reduced rate for qualified dividends, is a designated capital gain dividend, is an exempt-interest dividend, or is a return of capital.
In general, Internal Revenue Code § 852 states that special dividends eligible for reduced rates of taxation are allocated to distributions in the amounts designed by the company. These are supposed to match up, in the aggregate, to the amounts of these kinds of income that the RIC as a whole receives, and to be allocated pro-rata, although elaborate language in the statute and regulations governs what happens when the amounts don't match due to a screw up by the RIC administrators.
But, Internal Revenue Code § 851 through some cross references, still requires as a matter of federal securities law under Title 15 of the United States Code that an entity taxed as an RIC be a "unit investment trusts" which is "an investment company which (A) is organized under a trust indenture, contract of custodianship or agency, or similar instrument, (B) does not have a board of directors, and (C) issues only redeemable securities, each of which represents an undivided interest in a unit of specified securities; but does not include a voting trust."
So, the kind of structure in the original question is not allowed to be taxed as an RIC.
Some minor differences is allocation of expenses of administration at the investors level between different tiers of investors is allowed, as discussed below, but the basic rule that two distinct classes of stock with materially different economic rights as not allowed remains in force.
Before the RIC Mod Act, no dividends-paid deduction was available for
a distribution (and, therefore, no pass-through treatment for the
distributing RIC unless other deductible distributions satisfied the
Distribution Requirement) unless it was pro rata, with no preference
to any share as compared with other shares of the same class, and with
no preference to one class as compared with another class except to
the extent the former was entitled (without reference to waivers of
their rights by shareholders) to that preference (the so-called
“preferential dividend” rule). See section 562(c). The Service refused
to recognize multiple-class structures of the type adopted by RICs
(i.e., those based largely on differences in 12b-1 fees, shareholder
services, and sales charges) as creating separate “classes” for these
purposes. But hundreds of PLRs issued in the early 1990s and two
revenue procedures the Service issued later in that decade (Rev. Proc.
96-47, 1996-2 C.B. 338, and Rev. Proc. 99-40, 1999-2 C.B. 565) enabled
multiple-class RICs to have classes with different 12b1 fees and
certain other “class-specific” expenses, as well as waivers and
reimbursements of advisory fess and certain other such expenses,
without violating the preferential dividend rule.
This remains the rule for RICs that are not "publicly offered", but after the RIC Mod Act class specific differences in administrative fees between classes of investors who otherwise identical in their rights are authorized.
(Source)
As an analysis of the RIC Mod Act by the New York State Bar Association shortly after it was enacted explained:
Under current law, “preferential dividends” paid by a RIC are
ineligible for the dividends paid deduction.3
For this purpose, a dividend is preferential unless it is distributed
pro rata to shareholders, with no preference to any share of stock
compared with other shares of the same class, and with no preference
to one class as compared with another except to the extent the class
is entitled to a preference.4
Allocations of expenses, costs and rebates among shareholders may
result in “preferential” dividends and because of this concern the IRS
has published guidance on the specific circumstances under which such
allocations will not result in preferential dividends.5
The Act repeals the preferential dividend rule for publicly offered
RICs. For this purpose, a RIC is publicly offered if its shares are
(1) continuously offered pursuant to a public offering, (2) regularly
traded on an established securities market, or (3) held by no fewer
than 500 persons at all times during the taxable year.
Notwithstanding the elimination of the preferential dividend rule for publicly offered RICs, applicable securities law will continue to
provide limits on the ability of RICs to issue shares that may result
in preferences.6
1 Section 852.
2 Section 4982.
3 Section 562(c).
4 Id.
5 See, e.g., Rev. Proc. 96-47, 1996-2 C.B. 338; Rev. Proc. 99-40,
1999-46 I.R.B. 565.
6 See, e.g., Section 18 of the Investment Company Act of 1940.
