1 See Institute Memorandum to Accounting/Treasurers Committee No. 30-96 and Tax Committee No. 27-96, dated July 25, 1996.
ACTION REQUESTED
November 14, 1996
VIA FAX
TO: TAX COMMITTEE No. 35-96
RE: DRAFT SUBMISSION TO IRS ON MULTIPLE-CLASS FUNDS
______________________________________________________________________________
Attached for your review is a draft of a memorandum on expense limitation
arrangements (e.g., waivers and reimbursements) in a multiple-class fund context that was
prepared by the Institute for submission to the IRS. The draft provides supplemental
comments in support of the proposal the Institute submitted to the IRS in July of this year for a
safe harbor on expense limitation arrangements.1 As you may recall, the proposal specified the
following three types of expense limitations that would not be treated as giving rise to
preferential dividends: (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
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.
Also attached for your review is a draft of an attachment to the memorandum that
responds to questions raised by the IRS in Announcement 96-95 regarding the treatment under
the preferential dividend rules of (1) waivers and reimbursements in multiple-class funds and
(2) investment advisory fees that differ among the classes of a multiple-class fund because the
fees are based on the investment performance of each class. The attachment states that such
performance-based fees should be permissible under the preferential dividend rules.
We would appreciate any comments you may have on the draft memorandum and
attachment. Since the IRS deadline for comments is Friday, November 22, we will need to
receive any comments that you may have by Tuesday, November 19. Please call the
undersigned at (202) 326-5837 with any comments or questions. Thank you.
Anne M. Barr
Associate Counsel - Tax
Attachment