March 14, 1994
TO: ACCOUNTING/TREASURERS COMMITTEE NO. 10-94
TAX COMMITTEE NO. 9-94
RE: COMMENTS ON AGGREGATE INCOME ALLOCATION RULES FOR
SECURITIES PARTNERSHIPS
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As we previously advised you, the Internal Revenue Service published in
December, 1993, proposed and temporary regulations permitting certain
securities partnerships to use an aggregate method of allocating gains and
losses. (See Institute Memorandum to Accounting/Treasurers Members No. 3-94
and Tax Members No. 2-94, dated January 11, 1994.) An aggregate method for
allocating partnership gains and losses is particularly significant in the
context of the master/feeder fund structure, where the master fund partnership
holds a substantial portfolio of securities and the relative interests of the
feeder fund partners shift continuously.
Today, the Institute submitted the attached comment letter regarding the
application of the proposed IRS rules to master/feeder funds. The letter
commends the IRS for permitting aggregate allocations and recommends the
following three modifications for those securities partnerships that are open-
end investment companies registered under the Investment Company Act of 1940.
1. Registered, open-end investment companies should be deemed to meet
the requirement in the regulation that at least 90 percent of the
fair market value of the partnership's non-cash assets consist of
"readily tradable securities," as defined in Treasury Regulations.
2. Registered, open-end investment companies should be permitted to
aggregate gains and losses from all of their assets, not just
their assets that are "readily tradable".
3. The regulations should include a specific illustration of the
operation of the aggregate method on which funds may rely. The
Institute's comments describe one such method and provide examples
of its operation.
We will keep you informed of further developments.
Catherine L. Heron
Vice President and Senior Counsel
Attachment