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Mutual Fund Tax Bill Wins Approval in House

On Tuesday, the Regulated Investment Company Modernization Act (HR 4337), a bill that would modify mutual fund tax regulations for the first time in more than 20 years, was passed by the House.  The bill, sponsored by Charles Rangel (D-NY) and Richard Neal (D-MA.), is intended to improve the efficiency of funds' investment structures and reduce disproportionate tax consequences for inadvertent errors on funds' tax returns.

The bill would:  

  • permit RICs an unlimited carryforward of their net capital losses; 
  • eliminate restrictions on the investment of RICs in commodities; 
  • limit penalties for failure of RICs to satisfy gross income and asset tests; 
  • modify rules for allocating RIC capital gain dividend distributions; 
  • include certain nondeductible items of RIC income in earnings and profit calculations; 
  • allow funds of funds to pass through to their shareholders tax-exempt interest and foreign tax credits, without regard to certain investment limitations; 
  • modify rules relating to the declaration of RIC dividends, return of capital distributions, and stock redemptions; 
  • allow certain RICs with shares that are redeemable upon demand to treat distributions in redemption of stock as an exchange of fund shares or a dividend for tax purposes; 
  • allow a deferral of end-of-year losses of RICs; and 
  • modify excise tax and penalty rules applicable to RICs

No companion bill to HR 4337 is  pending currently in the Senate.  So, though the bill has cleared its first hurdle, it may be some time before this measure makes it through the Senate and potentially finds itself on the President's desk.  

The full text of HR 4337 is available at:  http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=111_cong_bills&docid=f:h4337eh.txt.pdf

The official, section-by-section, summary of the  Regulated Investment Company Modernization Act is available at:  http://waysandmeans.house.gov/media/pdf/111/MA_Summary.pdf  

A detailed analysis of HR 4337 is available from Stradley Ronon at:  http://www.stradley.com/newsletters.php?action=view&id=530