1 See Institute Memorandum to Tax Members No. 45-97 (among others), dated November 12, 1997. While IRS
originally may have anticipated issuing capital gains guidance during 1998, the 1998 IRS Business Plan states that
this guidance is not expected to be published until 1999. See Institute Memorandum to Tax Committee No. 8-98
(among others), dated March 4, 1998.
2 See Institute Memorandum to Tax Members No. 27-97 (among others), dated August 1, 1997.
[9979]
May 29, 1998
TO: TAX COMMITTEE No. 19-98
RE: REQUEST FOR CAPITAL GAINS GUIDANCE
______________________________________________________________________________
The Institute has submitted to IRS the attached memorandum responding to IRS Notice 97-64,1
which requested comments regarding changes made by the Taxpayer Relief Act of 19972 to the capital
gains rules. The memorandum addresses both issues raised specifically by the Notice, such as the new
“bifurcation adjustment,” and other long-standing issues relating to the interaction between the income
tax rules of Subchapter M and the excise tax rules of section 4982.
1. Issues Relating to the “Bifurcation Adjustment” Described in the Notice. The Institute’s
submission recommends several clarifications/modifications to the “bifurcation adjustment” described
in the Notice. Specifically, we recommend that: (a) IRS clarify that the bifurcation adjustment applies
for both designation purposes and taxable income purposes; (b) capital loss carryovers be deemed to
arise on the first day of the taxable year to which they are carried; and (c) bifurcation not apply if the
RIC has no post-October loss in any category. This last recommendation would help ensure that
bifurcation applies only where necessary to “protect” the character of capital gain distributions made for
excise tax purposes.
2. Recharacterization of Loss Under Section 852(b)(4)(A). Second, we recommend that any
short-term loss recharacterized under section 852(b)(4)(A) as a “long-term” loss be treated as a 20
percent rate loss. This recommendation avoids the difficulties that would arise for shareholders under
any approach that attempts to recapture the specific types of long-term gain included in the capital gain
dividend.
3. Interaction of Sections 1259 and 4982. Third, we recommend that IRS regulations (a) clarify
that the constructive sale rules of section 1259 (including the closed transaction exception) apply on the
basis of a RIC’s taxable (fiscal) year only and (b) provide, to any RIC seeking certainty as to the
includability of constructive sale income for excise tax purposes, an election not to apply the closed
transaction exception. In particular, we recommend that this election be made transaction by transaction
and documented on an excise tax return for the period during which the income subject to the election
arises. Any RIC making this election out of the closed transaction exception for a particular constructive
sale would have income for excise tax and income tax purposes as of the date the constructive sale was
entered into.
4. Additional Technical Modifications to Improve the Interaction Between the RIC Income Tax
and Excise Tax Regimes. Finally, we recommend the so-called “glitch fixes” to resolve long-standing
technical issues arising from the interaction between the income tax and excise tax regimes. The glitch
fixes address issues attributable to: (a) pre-January ordinary losses; (b) post-December ordinary losses; (c)
the automatic deferral of post-October losses for dividend designation purposes; (d) post-October net
short-term capital losses; (e) ordinary income and loss on dispositions of capital assets; and (f)
application of the post-October loss rules to RICs exempt from section 4982.
Keith D. Lawson
Senior Counsel
Attachment