November 23, 1993
TO: BOARD OF GOVERNORS NO. 108-93
RE: IRS ISSUES GUIDANCE ON 12b-1 DISTRIBUTOR TAX ISSUE
__________________________________________________________
As you may know, the Internal Revenue Service has been considering the
issue of whether a mutual fund distributor may deduct 12b-1 commission
payments to brokers. (See Institute memorandum to Board of Governors No. 38-
91, dated June 4, 1991.) In the attached IRS technical advice memorandum
("TAM"), the Service has concluded that such commission payments to brokers
are currently deductible. This conclusion is based upon the regulations under
Code section 263, which permit the deduction of commission payments by a
securities dealers.
The TAM further states that a fund distributor does not recognize
compensation income that may be paid under a 12b-1 plan in conjunction with
the sale of fund shares at the time of the sale. The contingencies relating
to the receipt of that income are described as sufficient to conclude that
income recognition is not required at the time of sale.
We will keep you informed of developments.
Catherine L. Heron
Vice President - Tax and Pension
Attachment