1 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.
2 See Institute Memorandum to Tax Members No. 65-92,
Accounting/Treasurers Members No. 37-92, Closed-End Fund Members No. 37-92,
Operations Members No. 37-92, Unit Investment Trust Members No. 50-92,
International Members No. 22-92 and Transfer Agent Advisory Committee No. 58-
92, dated October 8, 1992; and to Board of Governors No. 19-92, Tax Members No.
15-92, Closed-End Fund Members No. 13-92, Unit Investment Trust Members No. 20-
92, Accounting/Treasurers Members No. 12-92, Operations Members No. 11-92,
International Committee No. 7-92, Institutional Funds Committee No. 3-92 and
Transfer Agent Advisory Committee No. 14-92, dated March 23, 1992.
May 17, 1994
TO: ACCOUNTING/TREASURERS MEMBERS NO. 14-94
CLOSED-END FUND MEMBERS NO. 14-94
INTERNATIONAL MEMBERS NO. 3-94
OPERATIONS MEMBERS NO. 22-94
PENSION MEMBERS NO. 14-94
TAX MEMBERS NO. 23-94
TRANSFER AGENT ADVISORY COMMITTEE NO. 24-94
UNIT INVESTMENT TRUST MEMBERS NO. 20-94
RE: HOUSE APPROVES TAX SIMPLIFICATION LEGISLATION
__________________________________________________________
Today, the House of Representatives approved by a voice vote
H.R. 3419, the Tax Simplification and Technical Corrections Act
of 1993. The provisions of interest to regulated investment
companies ("RICs") and their shareholders are similar to
provisions contained in the tax simplification and technical
corrections bills introduced in 19931 and in the two tax bills
vetoed in 1992.2 Attached are copies of statutory bill language
and the House Ways and Means Committee Report's explanation for
several of the provisions. Anyone interested in obtaining copies
of materials for other provisions may do so by calling Theresa
Brice at (202) 326-5833.
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I. Mutual Fund Tax Simplification
A. 30 Percent Test Repeal
H.R. 3419 would repeal the 30 percent test of Internal
Revenue Code Section 851(b)(3) for taxable years ending after the
date of enactment. (See Attachment A.)
B. Shareholder Basis Reporting
H.R. 3419 also would require funds and brokers to provide
shareholders and the Internal Revenue Service with average cost
basis information for shares redeemed. (See Attachment B.) As
under previous bills, the reporting would be done on an account-
by-account basis and the taxpayer could elect whether or not to
use the information for each account. The provision would apply
to accounts opened on or after January 1, 1995, but would not
apply to accounts in which shares were acquired other than
through purchase.
Two significant changes are made by H.R. 3419 to the
shareholder basis reporting provisions contained in the bill that
was introduced in January 1993. First, a de minimis exception
would be added to the wash sale rule of Code section 1091. Under
the provision, as amended, losses not exceeding $25 from
dispositions during December of shares from a covered account
would be allowed, even though shares in the same fund are
acquired during January of the following calendar year and within
30 days of the redemption date(s) and the losses on the December
redemptions would otherwise be disallowed under the wash sale
rule. For example, if a shareholder redeems ten shares with a
cost basis of $100 and value of $90 on December 20 and purchases
ten shares on January 6, the $10 loss that would otherwise be
disallowed by Code section 1091 would be allowed.
Second, the sales load basis deferral rule of Code section
852(f) would be amended to provide that if (1) Load Fund A shares
are purchased and redeemed within 90 days and (2) Load Fund B
shares are purchased after December 31 of the year of the
redemption, and the load on the Fund B shares is reduced or
waived because of a "reinvestment right", the amount of the load
paid on the Fund A shares would (1) not be subtracted from the
basis of the previously-sold Fund A shares, (2) be included in
the shareholder's gross income as short-term capital gain in the
year the reinvestment right is exercised and (3) be included in
the basis of the Fund B shares.
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C. Bank Common Trust Fund Conversions
In addition, H.R. 3419 would permit the tax-free conversion
of bank common trust funds into RICs. (See Attachment C.)
Unlike the bills vetoed in 1992, H.R. 3419 would not permit RICs
to convert tax free to bank common trust funds.
II. Foreign Investment Provisions
A. Simplified Foreign Tax Credit Reporting
H.R. 3419 would allow individuals with no more than $200 of
creditable foreign taxes ($400 in the case of a joint return) and
no other foreign source income to elect a simplified method for
claiming the foreign tax credit. The provision would apply to
taxable years beginning after December 31, 1993.
B. Passive Foreign Corporations
In addition, H.R. 3419 would modify the passive foreign
investment company ("PFIC") rules. Under the bill, all shares of
passive foreign corporations ("PFCs") held by RICs would be
marked to market each year at October 31 for excise tax purposes
and at the RIC's fiscal year-end for income tax purposes, unless
a "qualified electing fund" election had been made by the RIC to
currently include in its income the PFC's income. Under a
transition rule, a RIC would be required to (1) mark to market
all PFC stock in its portfolio on the first day of the RIC's
first taxable year beginning after December 31, 1993, (2) pay a
nondeductible interest charge on the tax that would have been
collected had the PFC shares been marked to market in the prior
years and (3) distribute the mark-to-market gains to its
shareholders.
III. Pension Provisions
The legislation also includes design-based safe harbors for
section 401(k) nondiscrimination testing, expansion of the
availability of salary reduction simplified employee pensions
(SEPs) to employers with 100 or fewer employees, and elimination
of the 50 percent participation requirement for salary reduction
SEPs. H.R. 3419 also includes technical corrections to the
Omnibus Reconciliation Act of 1993 relating to the calculation of
cost-of-living adjustments to the $150,000 limitation on the
compensation that can be taken into account under retirement
plans under section 401(a)(17) of the Internal Revenue Code.
(See Attachment D.)
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* * *
We will keep you informed of developments.
Keith D. Lawson
Associate Counsel - Tax
Kathy D. Ireland
Associate Counsel - Pension
Attachments