August 5, 1993
TO: TAX COMMITTEE NO. 34-93
CALIFORNIA MEMBERS
RE: MEETING ON CALIFORNIA TREATMENT OF MULTI-TIER
(MASTER/FEEDER) FUNDS
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The Franklin Group of Funds is organizing a coalition of Investment Company
Institute members to address a problem which has arisen recently in California
concerning the state's treatment of multi-tier investment companies, or
master/feeder funds, where the master fund is organized as a business trust under
state law but is treated for federal income tax purposes as a partnership.
California statutes provide that, for California tax purposes, any entity
organized as a business trust for state law purposes will be treated as a
corporation, regardless of the classification of the entity for federal tax
purposes.
Thus, in a master/feeder fund structure in which the master fund is
organized as a business trust, the master fund would be treated as a corporation
for purposes of determining the California tax treatment of any funds, either
master fund or feeder fund, resident in California. Under the California
statute, therefore, the character and timing of the income recognized by either
a master fund or feeder fund resident in California will differ from that which
would occur if the master fund were treated as a partnership. The Franchise Tax
Board has indicated that a feeder fund resident in California which was invested
in a master fund organized as a business trust would be treated as having its
assets invested in a corporation for California tax purposes. Treatment of the
master fund as a corporation could potentially threaten the ability of the feeder
fund to pay tax-exempt dividends or dividends derived from interest on federal
obligations for California tax purposes, and may result in federal and California
differences in how income is reported at the master and feeder fund levels and
is distributed to the shareholders of the feeder funds.
Franklin is interested in organizing a California coalition of members to
obtain either legislation or an exemptive order from the Franchise Tax Board to
resolve these problems. Franklin is therefore organizing a meeting of interested
members to deal with this issue. The Institute will support the coalition's
efforts to alter the current California law. The organizational meeting of the
coalition will be held at 10:00 a.m. at the offices of Coopers & Lybrand, 350
South Grand Avenue (49th Floor), in Los Angeles on Wednesday, August 11, 1993.
For further information, please contact John McBeth of Franklin at (415)
312-2594 or David Beach of Coopers & Lybrand at (213) 356-6019.
If you will be attending the meeting, please contact John or Dave to
indicate your attendance before Tuesday, August 10.
David J. Mangefrida Jr.
Assistant Counsel - Tax