Legislation Before Congress Would Modernize US Mutual Fund Tax Rules

by Mike Godfrey, Tax-News.com, Washington

29 December 2009

Legislation has been introduced in the US House of Representatives that seeks to modernize tax rules related to regulated investment companies (RICs) to reduce the occurrence of problems for funds and their shareholders.

“Today’s investors face a wide spectrum of investment options, and we need to make sure that our tax laws are keeping pace with these choices,” explained Ways and Means Committee Chairman Charles B. Rangel (D-NY), who introduced the bill with co-sponsors Reps. Richard Neal (D-MA), Joe Crowley (D-NY) and Allyson Schwartz (D-PA).

He continued: “By modernizing the rules that apply to RICs, we can help minimize difficulties for funds and investors.”

“These reforms have been discussed for many years and the time has come to do simple and inexpensive updates to the code as it applies to mutual fund companies,” added Neal.

“For example, with the substantial changes to Form 1099 reporting, we need to conform the tax code rules for regulated investment companies so they are not operating under two conflicting sets of rules.”

H.R. 4337, the Regulated Investment Company Modernization Act of 2009, makes technical changes to achieve the following objectives:

• Modernization: The tax rules that relate to RICs date back more than a half century. Although these rules have been updated from time to time, it has been over 20 years since these rules were last revisited. In that time, many changes have occurred that eliminate the need for certain rules, including rules that prevent mutual funds from earning income from commodities, rules that relate to preferential dividends, and rules that require mutual funds to send separate annual dividend designation requirements to shareholders.
• Excise tax interactions: In 1986, Congress enacted an excise tax on the undistributed income of RICs. Over the past 20 years, mutual funds have identified a number of instances in which interactions between this excise tax and other tax rules can create problems for mutual funds and their shareholders. The bill would make a number of technical changes that would seek to remedy these interactions.
• Corporate tax interactions: Mutual funds are subject to special tax rules that only apply to regulated investment companies under the tax code. However, mutual funds are also subject to the general corporate tax rules that apply to redemptions and dividends. Sometimes, the interaction between these two sets of rules can create problems for mutual funds and their shareholders. The bill would make a number of technical changes that would seek to remedy the adverse effects of these interactions.

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