* See Institute Memorandum to Accounting/Treasurers Members No. 54-95, Closed-End Fund Committee No. 57-95,
International Committee No. 38-95, Operations Committee No. 34-95, Tax Members No. 52-95, Transfer Agent Advisory
Committee No. 60-95 and Unit Investment Trust Committee No. 82-95, dated November 21, 1995.
December 1, 1995
TO: TAX COMMITTEE No. 36-95
ACCOUNTING/TREASURERS COMMITTEE No. 53-95
OPERATIONS COMMITTEE No. 36-95
TRANSFER AGENT ADVISORY COMMITTEE No. 61-95
CLOSED-END FUND COMMITTEE No. 59-95
UNIT INVESTMENT TRUST COMMITTEE No. 85-95
RE: 1995 REPORTING OF LONG-TERM CAPITAL GAINS
_______________________________________________________________________________________
As we previously informed you* the "Balanced Budget Act of 1995" (the "Act") that Congress
recently approved would permit individuals to claim a 50 percent deduction for net long-term capital
gains realized from dispositions on or after January 1, 1995. In the case of gains realized by a regulated
investment company ("RIC") and distributed to its shareholders, eligibility for the capital gains
deduction at the shareholder level would be determined under a "look through" approach based upon
the date each asset was sold by the RIC, rather than upon the date the shareholder distribution was
made.
Although the President is expected to veto this legislation, a compromise budget reconciliation
bill could include capital gains effective date and "look-through" provisions comparable to those
contained in the Act. In this event, shareholders would need to be advised of the portion of their
capital gain dividend attributable to 1994 and, separately, the portion attributable to 1995 dispositions.
For example, if half of a RICs 1995 capital gain dividend were attributable to 1994 dispositions and
half attributable to 1995 dispositions, individual shareholders would need to know that half of the
dividend was eligible for the new 50 percent deduction, with the remaining half taxable under the
"old" rules, i.e., subject to tax at a maximum 28 percent rate.
At this time, no guidance exists regarding how such information would be reported to
shareholders. The Institute has discussed this reporting issue with an IRS official, who indicated that
the IRS Form 1099-DIV for 1995 distributions would NOT be revised to provide separate boxes for
capital gains realized by RICs in 1994 and 1995. Instead, according to this official, an announcement
would be made promptly following enactment of legislation indicating that RICs would have great
flexibility in reporting these gains to shareholders, such as by including the information with other
"supplemental" tax information.
The chances for enactment of capital gains legislation during 1995 remain uncertain. We will
keep you informed of developments.
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Keith D. Lawson
Associate Counsel - Tax