November 4, 1994
TO: BOARD OF GOVERNORS NO. 113-94
TAX MEMBERS NO. 45-94
ACCOUNTING/TREASURERS COMMITTEE NO. 55-94
RE: IRS RULING ON FUND 12b-1 FEES
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We are pleased to report that the Internal Revenue Service
has issued the attached revenue ruling regarding the tax
treatment of mutual fund 12b-1 fees. According to the ruling,
fund 12b-1 fees, except those incurred during the initial stock
offering period, are deductible as ordinary and necessary
business expenses pursuant to Code section 162(a).
Since fund 12b-1 fees are treated as deductible expenses
pursuant to this ruling, the maximum amount that a fund may
designate as a dividend must be reduced by the fund's 12b-1 fees.
Thus, for example, if a tax-exempt fund were to designate as a
tax-exempt dividend an amount in excess of its net tax-exempt
income (after reduction for 12b-1 fees), shareholders could not
treat that amount as tax-exempt income.
The ruling will not be applied adversely with respect to
12b-1 fees allocable to periods before April 1, 1995.
We will keep you informed of developments.
Catherine L. Heron
Vice President and Senior Counsel
Attachment