1 See Institute Memoranda to Tax Committee No. 23-95 and Accounting/Treasurers Committee No. 22-95, dated June 16, 1995, and to Tax Committee No. 33-95 and
Accounting/Treasurers Committee No. 45-95, dated November 2, 1995.
July 25, 1996
TO: ACCOUNTING/TREASURERS COMMITTEE No. 30-96
TAX COMMITTEE No. 27-96
RE: INSTITUTE SUBMISSION TO IRS ON MULTIPLE-CLASS FUNDS
______________________________________________________________________________
As you know, the Institute has asked the IRS to issue published guidance setting forth
the circumstances under which the IRS will not assert that dividends paid by a multiple-class
mutual fund are preferential.1 In connection with this request, the Institute submitted to the
IRS the attached letter, which was accompanied by (1) a draft of a revenue procedure on
multiple-class funds that was prepared by the Institute, and (2) a memorandum on expense
limitation arrangements (e.g., waivers and reimbursements) in a multiple-class context. The
letter reminds the IRS that issues relating to multiple-class funds are particularly important to
our members and that we would like to resolve these issues as soon as possible.
The draft revenue procedure sets forth "safe harbor" circumstances under which the IRS
will (1) respect the separate classes of a multiple-class fund, thus allowing dividends to differ
among the classes, and (2) permit expense limitation arrangements with respect to a fund’s
expenses. The criteria set forth in the draft revenue procedure for respecting the separate
classes generally are based on the requirements imposed by the Securities and Exchange
Commission pursuant to Rule 18f-3, with an additional requirement that each class is bona fide,
which means that each class is either publicly offered or has at least 500 beneficial owners. The
draft revenue procedure specifies three types of expense limitations that will not be treated as
giving rise to preferential dividends. The three types are as follows: (1) limitations that reduce
the expenses of a distribution arrangement and/or shareholder service arrangement for a
particular class or classes; (2) limitations that reduce management fees, or any other fund-wide
expenses, for all classes; and (3) limitations that reduce class-specific expenses for a particular
class or classes. The Institute’s proposal on expense limitations would significantly reduce the
inconsistencies between the tax and securities law treatment of expense limitations and would
relieve the industry from the unwarranted restrictions currently imposed by the IRS on expense
limitations.
We will keep you informed of developments.
Anne M. Barr
Assistant Counsel - Tax
Attachment