1 See Institute Memorandum to Tax Committee No. 23-95 and Accounting/Treasurers Committee No. 22-95, dated June 16, 1995.
ACTION REQUESTED
June 5, 1996
VIA FAX
TO: TAX COMMITTEE No. 20-96
RE: DRAFT SUBMISSION TO IRS ON PREFERENTIAL DIVIDENDS
_____________________________________________________________________________
Attached for your review is a draft revenue procedure on multi-class mutual funds that
was prepared by the Institute for submission to the IRS. The draft is based on a proposal that
the Institute previously submitted to the IRS for the issuance of published guidance for multi-
class funds. As you may recall,1 the proposal urged the IRS to issue a revenue procedure
providing that the IRS would not assert that dividends paid by a multi-class fund are
preferential if: (1) each class has a different arrangement for the distribution of its shares or for
the provision of shareholder services, or both; (2) each class is bona fide, which means that each
class is either publicly offered or has at least 500 beneficial owners; (3) expenses of the different
arrangements for distribution of shares or shareholder services are allocated to the class to
which the arrangement applies; (4) expenses that are otherwise associated with the class (either
because they relate to a class-specific service provided to that class or because they represent
the incremental cost of providing a common service to the class) may be either allocated to the
class or treated as a fund-wide expense; and (5) advisory expenses, custodial expenses and
other expenses associated with the fund’s portfolio must be treated as fund-wide expenses and
allocated proportionately to all of the fund’s shareholders.
In addition, the draft revenue procedure provides that: (1) each class must have
exclusive voting rights on any matter submitted to shareholders that relates solely to a
distribution or shareholder services arrangement for that class; (2) each class must have
separate voting rights on any matter submitted to shareholders in which the interests of the
class differ from the interests of any other class or classes; (3) any payments under a
distribution or shareholder services arrangement must be made pursuant to a written plan
setting forth the separate arrangement and the expense allocation of each class; and (4) the
classes must be separate state-law classes. These requirements are included in the draft to
address concerns expressed by the IRS regarding whether a funds classes should be treated as
separate classes for purposes of the preferential dividend rules. The first three requirements
also are required by the SEC pursuant to Rule 18f-3.
2 See Institute Memorandum to Tax Committee No. 16-96, dated May 24, 1996.
At the special meeting of the Tax Committee on Monday, June 10 at 2:00 p.m., we will
discuss this draft revenue procedure. We plan to focus primarily on the question of whether
the revenue procedure should address the effect of expense limitations (e.g., waivers and
reimbursements) in a multi-class context and, if so, what the guidance should say.2 The draft revenue
procedure includes a proposal being considered to provide guidance on expense limitations. Please review the proposal on expense limitations to determine
whether it will provide sufficient flexibility regarding expense limitation arrangements.
IRS representatives have asked us for "real-world" examples of situations involving expense limitations, such as waivers, reimbursements and/or
caps of a fund*s expenses, so please be prepared to discuss this at the meeting on June 10. Specifically, the IRS asked for information on the following: (1) the
types of expenses that are involved; (2) the reasons for expense limitations; (3) definitions of the terms "waiver," "reimbursement" and "cap"; and (4) the
identities and relationships of the parties involved in expense limitation arrangements.
If you have comments on the draft, but will not be attending the June 10 meeting, please call me by June 10 with your comments.
Anne M. Barr
Assistant Counsel - Tax
Attachment