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October 3, 1990
TO: PENSION MEMBERS NO. 38-90
INVESTMENT ADVISER MEMBERS NO. 49-90
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 44-90
RE: PRIVATE LETTER RULING ON MARKET-TIMING FEES FROM IRAs
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The Institute has received numerous recent inquiries
regarding IRS rulings on payments from IRAs to investment
advisers for market timing and other advisory services. As we
previously informed you, the IRS ruled that when a taxpayer's IRA
enters into an agreement with a market-timing service, which
transfers investments between various mutual funds, and under the
agreement the IRA is solely liable for the payment of the fees,
such payment is not a taxable distribution from the IRA. (See
Institute Memorandum to Pension Members No. 2-90, Investment
Adviser Members No. 4-90 and Investment Adviser Associate Members
No. 4-90, dated January 24, 1990.)
The IRS also ruled that a nonbank trustee or custodian of
an IRA may remit from the assets of the IRA any fees due to an
unrelated investment adviser on the account owner's instructions
without causing a taxable distribution to occur from the IRA.
IRS Private Letter Ruling 9005010 involved a situation where the
account owner, at his or her discretion, could designate and
authorize another person, such as a broker or other investment
adviser, who may or may not be an adviser related to the nonbank
custodian of the IRA, to direct the investment activity of the
account. A copy of this ruling is attached.
The ruling provides that the administrative expenses or
investment advisory fees paid by the IRA are considered fees of
the IRA trust, deductible to the IRA and not reportable on Form
W-2P as a distribution. It also states that payment by the
account owner of the adviser's fee or of the custodian's annual
fee was not an addition to the IRA for purposes of sections 219,
408 or 4973 of the Code.
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We will keep you informed of further developments.
W. Richard Mason
Assistant General Counsel
Attachment