1 See Institute Memorandum to Accounting/Treasurers Members No. 48-97 and Tax Members No. 45-97,
dated November 12, 1997.
[9445]
November 24, 1997
TO: TAX COMMITTEE No. 42-97
RE: CAPITAL GAINS ISSUES TO BE RAISED WITH IRS
______________________________________________________________________________
The attached letter discusses three issues that the Institute plans to raise with the
Internal Revenue Service ("IRS") regarding IRS Notice 97-64, which describes regulations to be
issued regarding the treatment by regulated investment companies ("RICs") of various types of
capital gain income.1 Please contact the undersigned at your earliest convenience (at 202-326-
5832) with your thoughts regarding any additional capital gains issues that should be raised
with IRS.
As you know, the Notice requested comments regarding the proper treatment of a loss
on the sale of RIC shares held for six months or less that is recharacterized under section
852(b)(4)(A) as a long-term loss to the extent of any capital gain dividend received on those
shares. The Institute supports an ease-of-administration rule pursuant to which the full
amount of any recharacterized loss would be treated as a 20 percent rate loss.
The second issue relates to the Notice’s announcement that "a RIC . . . determines the
maximum amounts which may be designated in each class of capital gains dividends by
performing the computation required by section 1(h) as if the RIC . . . were an individual whose
ordinary income is subject to a marginal tax rate of at least 28 percent." Because of the
uncertainty surrounding this Notice, the Institute will seek clarification regarding whether IRS
intends for RICs to follow the capital loss carryover rules applicable to individuals; such
treatment could result in RICs treating capital loss carryovers as 28 percent rate losses, but
presumably with no expiration on the period over which they could be carried forward.
Finally, the letter expresses an interest in pursuing with IRS an extension of the Notice’s
section 4982 "bifurcation approach" to situations covered by the existing post-October loss
rules, so that a RIC could net all of its post-October gains and losses against each other before
pushing any remaining loss into the RIC’s next taxable year.
Keith D. Lawson
Associate Counsel - Tax