September 27, 1990
TO: MEMBERS - ONE PER COMPLEX NO. 42-90
RE: STATUS OF BUDGET NEGOTIATIONS
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The negotiations over the Federal Budget for fiscal 1991
have reached a critical point because, without a budget
agreement, automatic government spending cuts take effect October
1. As you know, under consideration are two proposals that would
have a significant impact on investment companies: a securities
transaction excise tax ("STET") and the indexation of capital
assets for inflation ("indexing").
Securities Transaction Excise Tax - STET
The Institute and others have actively opposed a STET. In
particular, we have expressed our concern regarding the adverse
impact of 1) a STET imposed on shareholder transactions in money
market funds and 2) the double layer of tax resulting from a STET
imposed on both portfolio and shareholder transactions in all
funds. At the moment, the STET does not appear to be part of any
budget agreement. (See Institute Memoranda to Board of Governors
No. 58-90, Members - One Per Complex No. 32-90, Federal
Legislation Committee No. 5-90 and Tax Committee No. 21-90, dated
August 13, 1990; and to Members - One Per Complex No. 29-90,
dated August 1, 1990.) However, we will continue to monitor the
negotiations for a possible STET proposal.
Indexing of Capital Assets
It appears that President Bush has failed again in his
attempts to secure a preferential capital gains tax rate. Budget
talks have been deadlocked for weeks over this issue. Late last
night, it was reported that indexing of capital gains is under
very serious consideration as an alternative to the
Administration's capital gains proposal. As you know, indexing
would create substantial complexity for investment companies and
their shareholders.
Over the past year, the Institute has informed both
Congress and the Administration of the burdens imposed on funds
and their shareholders under various indexing proposals. Last
year, when indexing was included in the House version of the 1989
tax bill, the Institute succeeded in obtaining several provisions
clarifying the application of indexing to investment companies
and their shareholders. (See Institute Memorandum to Tax Members
No. 32-89, Closed-End Fund Members No. 43-89, Unit Investment
Trust Members No. 49-89, Accounting/Treasurers Committee No. 38-
89, Operations Committee No. 17-89 and Transfer Agent Advisory
Committee No. 24-89, dated September 27, 1989.) However, the
inherent complexity of indexing as applied to investment
companies and their shareholders is not resolved by the 1989
amendments and, in fact, cannot wholly be resolved under any
indexing proposal. While tax practitioners recognize the
inherent pitfalls of any indexing proposals, practical issues may
not be resolved in a final budget compromise, and may have to
await administrative action.
We will continue to inform Congress and the Administration
of our concerns about indexing and will keep you advised of
developments.
David Silver