11/ See Institute Memorandum to Board of Governors No. 43-92,
Tax Members No. 42-92, Accounting/Treasurers Members No. 25-92,
Closed-End Fund Members No. 31-92, Operations Members No. 23-92,
Unit Investment Trust Members No. 41-92 and Transfer Agent
Advisory Committee No. 32-92, dated July 2, 1992.
22/ See Institute Memorandum to Board of Governors No. 19-92,
Tax Members No. 15-92, Closed-End Fund Members No. 13-92, Unit
Investment Trust Members No. 20-92, Accounting/Treasurers Members
No. 12-92, Operations Members No. 11-92, International Committee
No. 7-92, Institutional Funds Committee No. 3-92 and Transfer
Agent Advisory Committee No. 14-92, dated March 23, 1992.
33/ A separate memorandum to Pension Members, Operations Members
and the Transfer Agent Advisory Committee describes various
pension-related provisions, including one that would permit all
September 30, 1992
TO: TAX MEMBERS NO. 59-92
ACCOUNTING/TREASURERS MEMBERS NO. 35-92
CLOSED-END FUND MEMBERS NO. 36-92
OPERATIONS MEMBERS NO. 32-92
UNIT INVESTMENT TRUST MEMBERS NO. 49-92
INTERNATIONAL MEMBERS NO. 20-92
TRANSFER AGENT ADVISORY COMMITTEE NO. 52-92
RE: SENATE APPROVES REVENUE ACT OF 1992
__________________________________________________________
The Senate late yesterday approved tax legislation
containing several provisions relevant to the investment company
industry. Many of the provisions contained in this bill are
substantially identical to provisions contained in the bill
passed by the House of Representatives in July 1/1 and in the
earlier legislation vetoed by the President in March. 2/2
This memorandum describes the non-pension-related
provisions affecting regulated investment companies ("RICs") and
their shareholders.3/3 Anyone interested in obtaining copies of
taxpayers to make deductible IRA contributions.
44/ See Institute Memorandum to Tax Members No. 41-91,
International Members No. 5-91 and Accounting/Treasurers Members
No. 27-91, dated September 25, 1991.
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relevant Senate Committee Report and statutory bill language may
do so by calling the undersigned at (202) 955-3585.
I. Mutual Fund Tax Simplification
The Senate bill includes the House bill provision that
would permit the tax-free conversion of bank common trust funds
into RICs. Unlike the House bill, the Senate bill also would
permit RICs to convert tax-free to bank common trust funds. The
provision would be effective for transfers occurring after the
date of enactment.
Neither of the other two mutual fund tax simplification
provisions contained in the House bill (repeal of the 30 percent
test and shareholder basis reporting) is included in the Senate
bill. However, since these provisions are in the House bill,
either or both of them could be included in any legislation
resulting from a joint House-Senate conference.
II. International Competitiveness Provisions
The Senate bill generally would permit U.S. source interest
income and short-term capital gains received by a fund to retain
their character when paid to foreign shareholders. The effect of
this treatment would be generally to exclude from U.S.
withholding tax that part of a fund dividend attributable to
interest and short-term gains. Similar interest and short-term
capital gain flow-through provisions were contained in S. 1748,
the Investment Competitiveness Act of 1991, which was introduced
last fall by Senator Baucus.4/4 This "flow-through" provision
would apply to taxable years of RICs beginning after the date of
enactment.
In addition, the bill directs the Treasury Department to
"conduct a study of tax issues relating to the maintenance and
enhancement of the competitiveness of the American economy in
light of changing economic policies in Europe and the increasing
globalization of the world economy." The report is to be
completed by January 1, 1994.
III. Foreign Investment Provisions
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The Senate bill includes the House bill provision that
would allow individuals with no more than $200 of creditable
foreign taxes and no other foreign source income to elect a
simplified method for claiming the foreign tax credit. The
provision would apply to taxable years beginning after December
31, 1991.
In addition, the Senate bill includes the House bill’s
modifications to the passive foreign investment company ("PFIC")
rules. Under the bill, all shares of passive foreign
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corporations ("PFCs") held by RICs would be marked to market each
year at October 31 for excise tax purposes and at the RIC’s
fiscal year-end for income tax purposes, unless a "qualified
electing fund" election had been made by the RIC to currently
include in its income the PFC’s income. Under a transition rule,
a RIC would be required to (1) mark to market all PFC stock in
its portfolio on the first day of the RIC’s first taxable year
beginning after December 31, 1992, (2) pay a nondeductible
interest charge on the tax that would have been collected had the
PFC shares been marked to market in the prior years and (3)
distribute the mark-to-market gains to its shareholders.
IV. Amortization of Intangibles
The Senate bill would require that the purchase price of
certain acquired intangible assets be amortized over a uniform
16-year period, rather than the 14-year period provided by the
House bill. Among the intangible assets covered by the bill are
goodwill, going concern value and various customer-based
intangibles, such as investment advisory contracts. The
provision generally would be effective for property acquired
after the date of enactment, although a taxpayer could elect to
have the bill apply to all property acquired after July 25, 1991.
In addition, unlike the House bill, taxpayers could elect to
retroactively apply the 16-year amortization period to 75 percent
of the adjusted basis of the asset for any "open" tax year, with
no depreciation deduction or amortization allowed for the
remaining 25 percent.
V. Taxpayer Bill of Rights Amendment
Like the House bill, the Senate bill would require that
information statements sent to payees include the name, address
and phone number of the payor’s information contact. The Senate
Report clarifies that the payor may provide the name and phone
number of the department with the relevant information. The
proposal would apply to statements required to be furnished after
December 31, 1992.
VI. Private Foundation Common Investment Funds
The Senate bill would provide, in new Code section 501(n),
that an organization comprised solely of at least 20 tax-exempt
private foundations generally would be treated as tax-exempt
itself, so long as the organization is organized and operated
solely to collectively invest in shares and securities on behalf
of its members. The proposal would apply to taxable years ending
on or after December 31, 1992.
VII. Educational Savings Bonds Provisions
The Senate bill would expand eligibility for the benefits
of Code section 135, which provides that interest income earned
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on certain qualified U.S. Series EE savings bonds is excludable
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from gross income if the proceeds of the bond upon redemption do
not exceed the qualified higher education expenses paid by the
taxpayer during the taxable year. Under the bill, qualified
higher education expenses would include certain amounts paid by
the taxpayer to an "eligible educational institution", such as a
college, for the tuition and fees of any individual and not
simply dependents. Second, the bill would repeal the present law
provision which phases out the section 135 exclusion for married
taxpayers filing joint returns with adjusted gross income between
$60,000 and $90,000 and for single taxpayers with adjusted gross
income between $40,000 and $55,000. The provision would apply to
U.S. Series EE savings bonds issued after December 31, 1989 and
redeemed after December 31, 1992.
VIII. Backup Withholding
The Senate bill would increase the Code section 3406 backup
withholding rate from 20 percent to 31 percent. This new rate
would apply to amounts paid after December 31, 1992.
* * *
We will keep you informed of developments regarding this
legislation.
Keith D. Lawson
Associate Counsel - Tax