June 25, 1991
TO: BOARD OF GOVERNORS NO. 46-91
EXECUTIVE COMMITTEE NO. 12-91
RE: WAYS AND MEANS LEADERSHIP INTRODUCES MUTUAL FUND BILL
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I am pleased to report a significant legislative
development. Late Monday afternoon, a bipartisan group of the
House Ways and Means Committee, led by Chairman Dan Rostenkowski
(D-IL) and ranking minority member Bill Archer (R-TX), introduced
legislation to modify the tax treatment of mutual funds. Joining
Rostenkowski and Archer in support of the bill were Michael
Andrews (D-TX), Raymond McGrath (R-NY), Beryl Anthony (D-AR),
Barbara Kennelly (D-CT) and William Thomas (R-CA).
The bill proposes to repeal the so-called "short-short"
test, provide shareholder basis reporting information and clarify
treatment of reimbursed expenses. The Chairman's Congressional
Record statement is attached, as is a copy of the bill and
explanation. In introducing the bill, the Chairman noted that
"the tax treatment of mutual funds and their shareholders has not
kept pace with changes in the industry. The bill that I am
introducing today would be a major step toward rectifying that
situation." Chairman Rostenkowski expects that the bill will be
the subject of a hearing in the near future.
SUMMARY OF PROVISIONS
Section 1 of the bill would repeal the 30 percent ("short-
short") test of section 851(b)(3) of the Internal Revenue Code
for all taxable years ending after the date of enactment. The
Chairman added that "Repeal of the rule will reduce tax
compliance burdens for mutual funds and bring the tax laws in
line with the realities of present-day securities markets and
investment strategies."
Section 2 of the bill would require mutual funds and
brokers to provide average cost basis information to fund
shareholders for accounts opened on or after January 1, 1993.
Additional shareholder reporting provisions are detailed in the
Attachments.
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Section 3 would amend the 90 percent qualifying income test
of Code section 851(b)(2) to provide that any reimbursement (or
other payment) with respect to the fund's expenses will be
disregarded in determining qualification under that section.
Thus, under the bill, a fund would not be disqualified under
section 851(b)(2) whether fees are limited by expense
reimbursements or by an advance negotiation which does not result
in any gross income to the fund.
The introduction of the legislation is encouraging and
should be viewed as a very positive development. However, I must
caution that despite its distinguished sponsorship, its outcome
will be determined by the willingness of the Congress to pass
meaningful tax legislation in this session. The Institute will
continue its efforts toward a successful conclusion and keep you
informed as developments occur.
David Silver
President
Attachments