July 2, 1991
TO: BOARD OF GOVERNORS NO. 49-91
TAX MEMBERS NO. 25-91
ACCOUNTING/TREASURERS MEMBERS NO. 16-91
RE: INSTITUTE RESPONSE TO IRS PROPOSED COORDINATED ISSUE PAPER
ON START-UP EXPENSES
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As you may know, the IRS industry specialist for the mutual
fund industry recently prepared a proposed coordinated issue
paper that would require mutual fund advisers to capitalize the
expenses they incur in connection with entering into advisory
contracts with funds. (See Institute memorandum to Tax Committee
No. 10-91 and Members - One Per Complex No. 16-91, dated April
15, 1991.) If approved by the IRS National Office, mutual fund
advisers could be targeted for audit with respect to the
coordinated issue, and IRS agents would be unable to settle the
audits on terms different from the coordinated issue paper,
without express permission from the IRS industry specialist
responsible for the issue.
Attached is a copy of the Institute's response to the IRS
proposal. Both the Institute's response and the industry
specialist's paper will be submitted to the IRS National Office.
The Institute's paper explains that mutual fund advisers are
constantly seeking new ways to make their advisory services
available to investors, often through the creation of new mutual
funds. The expenses incurred in connection with entering into
new advisory contracts are ordinary and necessary business
expenses of the adviser which must be incurred to preserve
existing advisory fees and to compete with other financial
service providers for additional revenue.
The paper further contradicts the IRS argument that advisory
contracts are separate and distinct assets for purposes of the
capitalization requirement of Code section 263. The contracts
have no ascertainable value at the time they are entered into and
merely permit the adviser to be compensated for its advisory
services to the fund, which may or may not be profitable.
We will keep you informed of developments on this matter.
Catherine L. Heron
Vice President - Tax & Pension