INSTITUTE REQUEST FOR GUIDANCE PROJECTS TO BE INCLUDED ON 2000 IRS/TREASURY BUSINESS PLAN

1 This project was on the IRS’ 1999 business plan, as requested by the Institute, with other “capitalization” issues to be addressed over a two-year period. None of the issues was resolved in 1999. The attached Institute letter further urges that the requested IRS guidance adopt the proposal that we submitted last November. See Institute Memorandum to Tax Committee No. 33-99 and the Task Force on Adviser/Distributor Tax Issues (among others), dated November 24, 1999. 2 These “interaction” issues were addressed in the Institute’s May 1998 submission to IRS. See Institute Memorandum to Tax Committee No. 19-98, dated May 29, 1998. 3 The requested guidance would (a) clarify that the constructive sale rules (including the closed transaction exception) apply on the basis of a RIC’s taxable year only and (b) provide, to any RIC seeking certainty as to the includability of constructive sale income for excise tax purposes, an election not to apply the closed transaction exception. [11546] January 11, 2000 TO: TAX COMMITTEE No. 2-00 TASK FORCE ON ADVISER/DISTRIBUTOR TAX ISSUES RE: INSTITUTE REQUEST FOR GUIDANCE PROJECTS TO BE INCLUDED ON 2000 IRS/TREASURY BUSINESS PLAN ______________________________________________________________________________ The Institute has submitted the attached letter to the IRS and Treasury requesting that the 2000 IRS/Treasury Priority Guidance Plan (also known as the “business plan”) include several items of interest to regulated investment companies (“RICs”) and their shareholders. The items are: (1) industry-wide guidance regarding the proper treatment of costs incurred by mutual fund sponsors in creating new funds;1 (2) guidance regarding the procedures pursuant to which taxpayers, including RIC shareholders, may elect to mark assets to market as of January 1, 2001 to establish eligibility for the qualified 5-year gain rules; (3) guidance regarding the deferral of post-October losses by a RIC for passive foreign investment company stock to which the section 1296 mark-to-market election applies; (4) guidance regarding the interaction between the income tax rules of Subchapter M of the Code and the excise tax minimum distribution requirements of section 4982,2 including: (a) promulgation of “bifurcation adjustment” regulations; (b) guidance that would clarify that short-term losses subject to section 852(b)(4)(A) are “recharacterized” as 20 percent rate losses; (c) guidance that would address the interaction between the constructive sale rules of section 1259 and the excise tax rules;3 and 4 These issues include: (a) pre-January ordinary losses; (b) post-December ordinary losses; (c) the automatic deferral of post- October losses for dividend designation purposes; (d) post-October net short-term capital losses; (e) ordinary income and loss on dispositions of capital assets; and (f) application of the post-October loss rules to RICs exempt from section 4982. 5 Among other things, the regulations should clarify that RICs no longer need to provide shareholders with foreign tax credit information calculated on a country-by-country basis, as the statutory requirement for such reporting was repealed in 1976. (d) guidance that would resolve long-standing technical issues arising from the interaction between the income tax and excise tax regimes;4 (5) guidance regarding the definition of a government security for RIC diversification purposes; and (6) guidance updating the regulations under section 853 pursuant to which RICs flow through foreign tax credits to their shareholders.5 Keith D. Lawson Senior Counsel Attachment