March 28, 1994
TO: ACCOUNTING/TREASURERS COMMITTEE NO. 13-94
TAX COMMITTEE NO. 14-94
RE: SURVEY OF RIC INVESTMENTS IN PARTNERSHIPS
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Introduction
As you may know, last year the Internal Revenue Service ("IRS")
suspended the issuance of private letter rulings relating to the master
fund/feeder fund structure, where the master fund in which a regulated
investment company ("RIC") invests substantially all of its assets, is treated
as a partnership for tax purposes. In particular, the IRS became concerned
that a RIC feeder fund could effectively defer its Code section 4982 excise
tax obligation to distribute currently its income by contending that the
partnership tax rules preclude it from accruing its share of the master fund's
income until the close of the master fund's taxable year.
Last fall, Treasury Department officials approached the Institute and
requested an analysis of the authority to treat a RIC feeder fund as receiving
(1) the master fund's capital gain net income on October 31 and (2) the master
fund's ordinary income on December 31 (an "October 31/December 31 accrual")
without regard to the master fund's taxable year-end. The attached Institute
memorandum was prepared in response to this request, with assistance from
members of the Tax Committee. In the submission, the Institute noted that an
October 31/December 31 accrual could be administered properly only if the RIC
were able to obtain the necessary tax information from the partnership.
Recent Data Request
The IRS has informed the Institute that it is considering guidance that
would require October 31/December 31 accruals for all RIC investments in
partnerships, with perhaps an exception for those investments that do not
exceed a certain de minimis or threshold amount. Such a rule would likely
apply significantly beyond the master fund/feeder fund context from which the
partnership income accrual issue arose.
The IRS has asked the Institute for information regarding the extent to
which RICs invest in partnerships outside of the master fund/feeder fund
structure. Due to the urgency of the IRS request, we spoke with several fund
complexes by telephone and relayed the information we were able to gather to
the IRS. The attached survey is intended to assemble a more complete picture
of the extent to which RICs invest in partnerships in the hope that the
additional data may be helpful in working with the IRS to develop an
administrable threshold for applying October 31/ December 31 accruals.
Because the IRS has indicated that it is moving quickly on this issue, we
request that you fax one survey response for your complex by April 4, 1994 to
Peter Cinquegrani at (202) 326-5841 or (202) 326-5839. If you have any
questions or comments, please call Peter at (202) 326-5837 or Keith Lawson at
(202) 326-5832.
We will keep you informed of developments.
Keith D. Lawson
Associate Counsel - Tax
Peter J. Cinquegrani
Assistant Counsel - Tax
Attachments