11 See Institute Memorandum 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 and Transfer
Agent Advisory Committee No. 3-93, dated January 13, 1993.
January 19, 1993
TO: TAX COMMITTEE NO. 4-93
ACCOUNTING/TREASURERS COMMITTEE NO. 4-93
OPERATIONS COMMITTEE NO. 2-93
TRANSFER AGENT ADVISORY COMMITTEE NO. 6-93
RE: JANUARY 29 MEETING ON SHAREHOLDER BASIS REPORTING
__________________________________________________________
As we previously informed you11, the recently-introduced
tax simplification legislation, H.R. 13, includes a provision
that would require the reporting of average cost basis to certain
shareholders in regulated investment companies ("RICs").
Although largely similar to the shareholder basis reporting
legislation in previous bills, H.R. 13 would make changes to the
basis adjustments required by the wash sale rule of section 1091
and the sales load basis deferral rule of section 852(f). The
Internal Revenue Service also has raised certain issues in
connection with the legislation.
Given the importance of these proposed changes and the
likelihood that tax legislation will be actively considered in
the near future, a meeting devoted exclusively to shareholder
basis reporting has been scheduled at the Institute for Friday,
January 29 at 10:00 a.m. We urge those planning to attend to
discuss the issues set forth below (and any others of concern)
with others in their organizations so that all of the relevant
viewpoints (tax, accounting, operations and marketing) are
considered during the meeting. If you plan to attend this
meeting, please call Theresa Brice at 202-955-3525 no later than
Tuesday, January 26. Lunch will be served.
ISSUES TO BE CONSIDERED
1. Wash Sales (Code Section 1091)
The Institute previously suggested that the wash sale rule
not apply to a shareholder who redeems shares in a fund in
December and purchases shares in the same fund in January if (1)
the purchase is pursuant to a dividend reinvestment plan or other
automatic purchase program or (2) the amount of the disallowed
loss is $25 or less. H.R. 13 would amend the wash sale rule to
disregard shares purchased, pursuant to a dividend reinvestment
program, after January 15 of the year following the year of the
redemption, so long as (1) the shareholder entered into the
dividend reinvestment program 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" subject to average
cost reporting.
2. Sales Load Basis Deferral (Code Section 852(f))
The Institute previously suggested that the sales load
basis deferral rule not apply if a shareholder purchases and
redeems shares in a fund ("Fund A") within 90 days and has not,
by January 31 of the year following the year of the redemption,
acquired shares in another Fund ("Fund B") at a reduced or waived
load. H.R. 13 would amend section 852(f) to provide that a
purchase and redemption of Fund A shares within 90 days and the
acquisition of Fund B shares at a reduced or waived load, after
January 15 of the year following the year of redemption, have the
following tax consequences: (1) the load would remain in the
basis of the Fund A shares, (2) the amount of the load would be
included in the shareholder's income as short-term capital gain
in the year the shares in Fund B are acquired at a reduced load
or waived load and (3) the amount included in income as short-
term capital gain would be included in the basis of the Fund B
shares. Among the alternative proposals to be considered on
January 29 are those that would apply section 852(f) only if, (1)
the acquisition of the Fund B shares occurs within 30 (or 45 or
90) days of the acquisition of the Fund A shares or (2) the
acquisition of the Fund B shares occurs by February 15 (or 28) of
the year following the year of the redemption.
3. Return of Capital
H.R. 13 does not address the treatment of returns of
capital on shareholder basis reports prepared by fiscal-year
funds. The Institute is developing a regulatory return of
capital proposal whereby funds would report all distributions
through December 31 of a fiscal year as taxable, with any return
of capital allocated ratably to distributions made during the
remainder of the fiscal year. In those situations where a fund
reasonably believes that its post-December 31 distributions (if
any) will be insufficient to absorb the return of capital, the
fund would be permitted to report to shareholders that a portion
of its pre-December 31 distribution(s) is a return of capital.
However, the fund would be subject to an additional penalty if
the amount of the return of capital allocated to the pre-January
1 distribution(s) exceeded the amount that would have been
reported had the return of capital been allocated ratably,
following the close of the fund's fiscal year, to all of its
fiscal-year distributions.
4. "Election In" For Pre-1995 Accounts
The Institute has opposed any effort to require the
reporting of average cost basis to shareholders whose accounts
are opened before some prospective effective date. H.R. 13
reflects the Institute's concerns by applying only to accounts
opened on or after January 1, 1995. The IRS is considering a
proposal to permit shareholders with pre-1995 accounts to elect
into the legislative reporting system by completing a detailed
form that would provide the fund with all of the information
necessary to compute the shareholder's average cost. It appears
that funds would be obligated to accept such information from
their shareholders and might even be required to provide
shareholders with the information they would need to complete the
form. It is uncertain whether funds would have any obligation to
verify or otherwise review the information provided.
5. "Election In" for "Kicked Out" Post-1994 Accounts
H. R. 13 provides that average cost reporting will not be
required if a post-1994 account includes any shares acquired
other than by purchase. The IRS is considering a proposal to
permit a shareholder of such an account to provide the fund with
the cost basis for the non-purchased shares so that cost basis
reporting could continue to be provided for the account. As with
the "election in" for pre-1995 accounts, it is uncertain whether
funds would have any obligation to verify or otherwise review the
information provided.
6. Prohibition on Use of Average Cost by Shareholders With
Pre-1995 Accounts in Same Fund
H.R. 13 provides that the computation of basis using
average cost could be elected on an account-by-account basis.
The IRS is considering a proposal to prohibit a shareholder from
computing basis in a post-1994 account using average cost
information provided by the fund, if the shareholder has a pre-
1995 account in the same fund. It is possible that this proposal
would be advanced as an additional incentive to encourage
shareholders with pre-1995 accounts to elect into average cost
reporting.
7. Additional "Election Out" of Average Cost Reporting
H.R. 13 provides that a shareholder would be required to
compute basis in a "covered account" using average cost unless an
alternative method is elected on the tax return relating to the
first redemption from the account. The IRS has expressed some
interest in permitting shareholders who do not elect out of
average cost in this manner to later elect out of the average
cost method.
* * * * *
We hope all interested groups will plan to send one or more
representatives to the meeting on the 29th.
Keith D. Lawson
Associate Counsel - Tax