WAYS AND MEANS COMMITTEE APPROVES REPEAL OF 30% LIMITATION, OTHER TAX PROVISIONS

June 13, 1997 TO: BOARD OF GOVERNORS No. 37-97 FEDERAL LEGISLATION MEMBERS No. 8-97 PRIMARY CONTACTS - MEMBER COMPLEX No. 38-97 PUBLIC INFORMATION COMMITTEE No. 19-97 RE: WAYS AND MEANS COMMITTEE APPROVES REPEAL OF 30% LIMITATION, OTHER TAX PROVISIONS _____________________________________________________________________________ Early this morning, the House Ways and Means Committee approved tax legislation that includes items of interest to the investment company industry:
30% limitation ("short-short" rule)
The 30% limitation on the sale or disposition of securities held for less than three months by regulated investment companies would be repealed, effective for tax years ending after the date of enactment of the bill.
IRA expansion
IRA withdrawals for higher education expenses would no longer be subject to a 10-percent early withdrawal tax. In addition, beginning January 1, 1998, present-law nondeductible IRAs would be replaced with new "American Dream IRA Accounts," which would not have an income limit on eligibility. Contributions to an American Dream IRA account would not be tax-deductible. Withdrawals from the account would not be included as income or subject to a 10-percent early withdrawal tax if the individual has established an account that is at least five years old and the withdrawals were either: 1) made after the individual attained 59½; or 2) were made for a first-time home purchase, higher education expenses, on account of death or disability, or in the form of an annuity. Other withdrawals would be taxable to the extent of earnings on contributions.
Education investment accounts
The legislation would establish "education investment accounts," in which nondeductible contributions of up to $5,000 per year per beneficiary (up to an aggregate of $50,000 per beneficiary) could be made until the account holder reached age 18. Contributions would count against the $10,000 annual exemption for tax-free gifts now in current law.
Capital gains
The maximum capital gain tax rate for individuals would be reduced from 28 percent to 20 percent (or to 10 percent for lower-income persons taxed at a 15 percent rate), effective May 7, 1997. The cost basis of assets acquired on or after January 1, 2001 could be indexed for capital gains purposes, subject to a three-year holding period requirement. A taxpayer holding assets on January 1, 2001 could elect to -2- realize the capital gains for tax purposes on that date (without actually disposing of the assets), and the assets would subsequently be eligible for indexing.
Simplified foreign tax credit
Mutual fund shareholders generally would no longer be required to fill out a special form to accompany their tax returns in order to take the foreign tax credit.
Passive Foreign Investment Companies (PFICs)
PFIC shareholders (including mutual funds investing in PFICs) would generally be able to elect to realize their gains annually for tax purposes, and thus avoid the anti-deferral penalties under present law. The House is expected to act on the legislation before the July 4 recess. The Senate Finance Committee is expected to complete action on its tax proposal next week. We will keep you informed as these issues develop. Matthew P. Fink President