August 17, 1989
TO: TAX COMMITTEE NO. 13-89
ACCOUNTING/TREASURERS COMMITTEE NO. 34-89
RE: SPECIAL MEETING REGARDING INDEXATION OF CAPITAL GAINS
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As you know, recent negotiations over the Administration's
proposal to reduce the tax rate applicable to capital gains have
produced a number of proposals that would provide for indexation
of equity securities and certain other capital assets. There is
the possibility that an indexing provision will be included in
any tax legislation considered by Congress this year.
Indexation raises particular issues for mutual funds and
other pass-through entities. This spring, the Institute filed
the attached comments with the House Ways and Means Committee
which addressed issues relating to indexing by both fund
shareholders and funds themselves. The comments noted the
complexities created for a shareholder attempting to index
different blocks of fund shares acquired on different dates on
the basis of different inflation adjustment factors. The
comments also noted the fact that shares of many mutual funds
will not be fully indexable since the funds own both equity
securities (which would be indexed) and debt securities (which
would not be indexed), and suggested provisions designed to
simplify the necessary computations.
The most recent indexing proposals under discussion include
new features that would create additional complexity. For
example, indexing might apply only to assets owned by
individuals, and not by corporations, creating problems for funds
with both types of shareholders. Other problems would arise from
provisions: applying indexing only to assets acquired after a
specified future date; denying indexing for assets held less than
one year; and denying indexing for assets the sale of which
results in losses.
Although no formal legislative language has yet been
released, the Institute's staff, a subcommittee of the Tax
Committee and outside tax counsel to the Institute have been
working to identify issues and to develop possible solutions.
In order to discuss these issues and to obtain your views,
a special meeting of the Tax and Accounting-Treasurers Committees
has been scheduled for 2:00 p.m. on Tuesday, August 29th at the
Capital Hilton located at 1001 K Street, N.W., Washington, D.C.
Lunch will be available at 1:00 p.m. Please contact Betsy Teter
at (202) 955-3529 by Friday, August 25th, if you will attend this
meeting.
We look forward to seeing you on August 29th.
Matthew P. Fink
Senior Vice President and
General Counsel
Attachment