September 30, 1992
TO: BOARD OF GOVERNORS NO. 72-92
RE: SENATE APPROVES REVENUE ACT OF 1992
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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 (see Institute
Memorandum to Board of Governors No. 43-92, dated July 2, 1992)
and in the earlier legislation vetoed by the President in March.
(See Institute Memorandum to Board of Governors No. 19-92, dated
March 23, 1992.)
I. Mutual Fund Tax Simplification
The Senate bill would permit the tax-free conversion of (a)
bank common trust funds into regulated investment companies
("RICs") and (b) RICs into bank common trust funds. 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, either
or both of these provisions could be included in any legislation
resulting from a joint House-Senate conference.
II. Individual Retirement Arrangements (IRAs)
The Senate bill would expand eligibility for deductible IRA
contributions. Under the bill, taxpayers covered by retirement
plans could fully deduct IRA contributions if their adjusted
gross incomes were under $80,000 for individuals, or $120,000 for
joint filers, effective after December 31, 1993. The IRA
deduction would be subject to a last-dollar offset to the limit
on elective deferrals to section 401(k) and similar plans. One
spouse’s coverage under a retirement plan would not affect the
other spouse’s eligibility for the deduction, and the income
limitations and the maximum deductible amount would be indexed
for inflation.
The bill would also permit the establishment of special
IRAs, the contributions to which would not be deductible, but
withdrawals from which would be tax free if attributable to
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contributions held for more than five years. Contributions to
special IRAs would also be subject to the income limitations and
the last-dollar offset to the 401(k) plan limit. Penalty-free
transfers from deductible IRAs to special IRAs would be permitted
after December 31, 1992, subject to the income limitations, and
would qualify for favorable tax treatment if accomplished before
January 1, 1994.
Penalty-free withdrawals from IRAs, section 401(k) plans
and section 403(b) arrangements would be permitted for purchases
of new American made automobiles during 1992 and 1993, and for
first-time home purchases, educational expenses, and medical
expenses, and from IRAs for the long-term unemployed, effective
after December 31, 1992.
III. International Competitiveness Provisions
The Senate bill would generally permit U.S. source interest
income and short-term capital gains received by a fund to flow
through to foreign shareholders free from U.S. withholding tax.
Similar flow-through provisions were contained in S. 1748, the
Investment Competitiveness Act of 1991, which was introduced last
fall by Senator Baucus. (See Institute Memorandum to Board of
Governors No. 77-91, dated September 27, 1991.)
IV. Foreign Investment Provisions
The Senate bill would generally allow fund shareholders
with no more than $200 of creditable foreign taxes to elect a
simplified method for claiming the foreign tax credit. In
addition, the Senate bill would require that shares of passive
foreign corporations ("PFCs") held by RICs 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.
V. Amortization of Intangibles
The Senate bill would require that the purchase price of
certain acquired intangible assets, including investment advisory
contracts, be amortized over a uniform 16-year period. Taxpayers
could elect to apply the provision to all property acquired after
July 25, 1991. In addition, taxpayers could elect to
retroactively apply the provision to 75 percent of the adjusted
basis of the asset for any "open" tax year, with no amortization
allowed for the remaining 25 percent.
VI. Education Savings Bond Provisions
The Senate bill would expand eligibility for the benefits
of Code section 135, which provides that interest income earned
on certain qualified U.S. Series EE savings bonds is excludable
from gross income if the proceeds of the bond upon redemption do
not exceed the qualified higher education expenses paid by the
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taxpayer during the taxable year. Under the bill, qualified
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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. The bill would also 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.
VII. 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.
* * *
Copies of relevant Senate Committee Report and statutory
bill language may be obtained by calling Kathy Ireland at (202)
955-3516 (pension matters) or Keith Lawson at (202) 955-3585 (tax
matters).
We will keep you informed of developments regarding this
legislation.
Kathy D. Ireland
Associate Counsel - Pension
Keith D. Lawson
Associate Counsel - Tax