Bill marks first attempt to update law since 1986; would likely lead to fewer amended returns
A bill that would streamline taxation of mutual funds and provide fund-of-fund shareholders more tax benefits gained unanimous House approval yesterday. The measure faces somewhat uncertain prospects in the Senate, however.
The House OK'd the Regulated Investment Company Modernization Act on a voice vote, but no parallel measure has been introduced in the Senate. It now joins many other bills — and tax policy in general — in legislative limbo as Congress goes into recess this week until after the November elections.
The measure, the first attempt to reform of mutual fund tax law since 1986, would allow qualified funds of funds to pay interest-exempt dividends even if less than 50% of their assets are invested in tax-exempt state and local bonds. Funds of funds also could pass through to its shareholders foreign tax credits if less than 50% of the fund consists of securities in foreign corporations.
Among more than a dozen other changes, the bill would allow mutual funds to carry forward net-capital losses in the same way that individuals can. It also would permit gains from derivative contracts to be counted as qualifying income and limits penalties for failures to meet gross income and asset tests. In addition, the measure would eliminate the distribution designation requirement, letting the shareholder's Form 1099 suffice.
“The legislation would … not only improve the efficiency of funds' investment structures and reduce disproportionate tax consequences for inadvertent errors, but also minimize the need for amended tax statements and amended tax returns,” Paul Schott Stevens, president and chief executive of the Investment Company Institute, said in a statement.
When lawmakers return for a lame-duck session in mid-November, the mutual fund tax bill could be attached to other tax legislation, such as a measure that would renew some or all of the Bush administration tax cuts set to expire at the end of the year.
The fact that the House approved the bill by voice vote demonstrates its bipartisan support, which may help it get through the Senate.
“Ultimately, this bill would eliminate uncertainties and allow appropriate innovations, so that fund companies can better focus on serving their shareholders,” Mr. Schott said.
