[12409]
September 14, 2000
TO: BOARD OF GOVERNORS No. 53-00
RE: IRS ISSUES GUIDANCE ON CAPITALIZATION OF 12B-1 FEES
I am pleased to inform you that the Internal Revenue Service has issued Revenue
Procedure 2000-38, which provides electing mutual fund distributors with certainty that the IRS
will not challenge the deductibility of commissions paid on the sale of B shares through
December 31, 2000 and will not impose any adjustment for prior years. The guidance does not
affect the deductibility of commissions paid on C shares.
Commissions incurred by electing distributors on sales after December 31, 2000 will be
capitalized and amortized using one of three methods. Elections into the Revenue Procedure
must be made on or before April 2, 2001. Distributors that do not elect to be subject to the
Revenue Procedure will remain subject to audits and adjustments, both retroactively and
prospectively.
In its guidance, the IRS provides that fund distributors may elect, on a fund-by-fund
basis, to capitalize B share commissions based either on the average “useful life” of a fund’s B
share or on one of two safe harbor methods. Under all three methods, accelerated deductions
will be permitted for securitizations.
Distributors electing to follow a “useful life” method do not need pre-approval for their
method for determining the useful life of B shares or the rate of recovery. Under the guidance,
however, the IRS reserves the right to audit a distributor’s useful life calculation. The “fixed
method” safe harbor permits fund distributors to capitalize B share commissions pro rata over a
five-year period. The “tracking method” safe harbor permits fund distributors to capitalize
commissions pro rata over the period that a distributor is to receive a distribution fee from the
fund, with accelerated deductions permitted for contingent deferred sales commissions actually
received.
I would like to thank the many Institute members who helped to achieve this result.
Matthew P. Fink
President
Attachment
2Attachment (in .pdf format)