11/ See Institute Memorandum to Tax Members No. 65-92,
Accounting/Treasurers Members No. 37-92, Closed-End Fund Members
No. 37-92, Operations Members No. 37-92, Unit Investment Trust
Members No. 50-92, International Members No. 22-92 and Transfer
Agent Advisory Committee No. 58-92, dated October 8, 1992; and 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.
22/ A separate memorandum to Pension Members describes various
pension simplification provisions.
January 13, 1993
TO: TAX MEMBERS NO. 5-93
ACCOUNTING/TREASURERS MEMBERS NO. 3-93
CLOSED-END FUND MEMBERS NO. 4-93
OPERATIONS MEMBERS NO. 4-93
UNIT INVESTMENT TRUST MEMBERS NO. 4-93
INTERNATIONAL MEMBERS NO. 4-93
TRANSFER AGENT ADVISORY COMMITTEE NO. 3-93
RE: CHAIRMAN ROSTENKOWSKI INTRODUCES TAX BILLS
__________________________________________________________
House Ways and Means Committee Chairman Rostenkowski
recently introduced H.R. 13, the Tax Simplification Act of 1993,
and H.R. 17, the Technical Corrections Act of 1993. Many of the
provisions contained in H.R. 13 are similar to provisions
contained in the two tax bills vetoed last year by President
Bush.1/1 This memorandum describes several non-pension-related
provisions in the bills that would affect regulated investment
companies ("RICs") and their shareholders. 2/2 Attached are copies
of statutory bill language and the Joint Committee on Taxation's
Technical Explanation for several of the provisions. Anyone
interested in obtaining copies of materials for other provisions
may do so by calling the undersigned at (202) 955-3585.
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I. Mutual Fund Tax Simplification
H.R. 13 would repeal the 30 percent test of Internal
Revenue Code section 851(b)(3) for taxable years ending after the
date of enactment. (See Attachment A.)
H.R. 13 also would require funds and brokers to provide
shareholders and the Internal Revenue Service with average cost
basis information for shares redeemed. (See Attachment B.) As
under previous bills, the reporting would be done on an account-
by-account basis and the taxpayer could elect whether or not to
use the information for each account. The provision would apply
to accounts opened on or after January 1, 1995, but would not
apply to accounts in which shares were acquired other than
through purchase.
Two significant changes are made by H.R. 13 to earlier
basis reporting proposals. First, the wash sale rule of Code
section 1091 would be amended to disregard any shares purchased,
pursuant to a dividend reinvestment plan, after January 15 of the
year following the year of redemption, so long as (1) the
shareholder entered into the dividend reinvestment plan when the
account was opened or, if later, at least 6 months before the
date of redemption and (2) the redemption is from a "covered
account" on which basis reporting is required. Second, the sales
load basis deferral rule of Code section 852(f) would be amended
to provide that if (1) Load Fund A shares are purchased and
redeemed within 90 days and (2) Load Fund B shares are purchased
after January 15 of the year following the year of the
redemption, and the load on the Fund B shares is reduced or
waived because of a "reinvestment right", the amount of the load
paid on the Fund A shares would (1) not be subtracted from the
basis of the previously-sold Fund A shares, (2) be included in
the shareholder's gross income as short-term capital gain in the
year the reinvestment right is exercised and (3) be included in
the basis of the Fund B shares.
In addition, H.R. 13 would permit the tax-free conversion
of bank common trust funds into RICs. (See Attachment C.)
Unlike the bill vetoed by President Bush last November, H.R. 13
would not permit RICs to convert tax free to bank common trust
funds.
II. Foreign Investment Provisions
H.R. 13 would allow individuals with no more than $200 of
creditable foreign taxes ($400 in the case of a joint return) 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, 1992.
In addition, H.R. 13 would modify the passive foreign
investment company ("PFIC") rules. Under the bill, all shares of
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passive foreign corporations ("PFCs") held by RICs would be
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marked to market each year atOctober 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, 1993, (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.
III. Amortization of Intangibles
H.R. 13 would require that the purchase price of certain
acquired intangible assets be amortized over a uniform 14-year
period. 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 would be generally 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.
IV. RIC - NonRIC Mergers
The Technical Corrections bill (H.R. 17) would amend Code
section 852(a) to provide that a RIC will not qualify for tax
treatment under Subchapter M of the Internal Revenue Code if a
nonRIC (such as a personal holding company) merges into the RIC
after January 5, 1993 and any earnings and profits accumulated by
the nonRIC are not distributed prior to the end of the RIC's
fiscal year. (See Attachment D.) As you may know, the IRS
issued proposed regulations last month which would provide the
same rule with respect to mergers occurring on or after December
22, 1992. (See Institute Memorandum to Tax Members No. 80-92 and
Accounting/Treasurers Members No. 45-92, dated December 23,
1992.) The Technical Explanation to H.R. 17 provides that no
inference is intended with respect to present law on whether a
RIC that succeeds to earnings and profits of a nonRIC is
permitted to retain those earnings and profits and continue to be
taxable as a RIC.
* * *
We will keep you informed of developments.
Keith D. Lawson
Associate Counsel - Tax