The Internal Revenue Service recently issued a "revenue procedure ruling," which "provides a safe harbor for the treatment of certain payments received by ... a money market fund registered with the Securities and Exchange Commission and regulated under Rule 2a-7 of the Investment Company Act of 1940."
Joan Ohlbaum Swirsky, Counsel for Stradley Ronon Stevens & Young and author of "The Guide to Rule 2a-7: A Map through the Maze for the Money Market Professional," explains, "This ruling allows short term capital gain treatment for contributions by an adviser to a money fund that are made to repair impaired share value or to purchase a low valued portfolio security for a price above its fair market value. This treatment essentially allows the contribution to be kept within the fund rather than dividended out where there is an offsetting realized loss (capital or ordinary). So this treatment could be useful for a fund that sells a holding with an impaired value or a fund that experiences prolonged negative yields that impair share value."
The IRS ruling's Background says, "Money Market Funds strive to maintain a stable per share net asset value of $1.00. Persons who contract to perform investment advisory or management services are concerned that a decline in per share net asset value to a threshold amount below $1.00 (commonly referred to as 'breaking the buck') will significantly harm their business reputations and could lead to litigation by shareholders. These Advisors may make a payment to the Money Market Fund in order to maintain a per share net asset value of $1.00. This Payment is not calculated with reference to the investment advisory fees paid or to be paid to the Advisor by the Money Market Fund, is not a loan to the Money Market Fund, and does not give the Advisor any ownership interest in the Money Market Fund."
It also explains, in "Excess Amount Received in a Purchase Transaction, ... an Advisor may purchase an asset of a Money Market Fund for an amount that exceeds the asset's fair market value.... When property is purchased for an amount above fair market value for a purpose other than the acquisition of the property, the Excess Amount ... is generally not accounted for as part of the purchase/sale transaction for tax purposes. The Excess Amount should be treated in the same manner as a Payment described in section 2.01 of this revenue procedure."
Finally, the ruling says, "The Internal Revenue Service will not challenge the treatment of a Payment or Excess Amount by a Money Market Fund to which this revenue procedure applies if the Money Market Fund treats the Payment or Excess Amount as short-term capital gain in the taxable year in which the Payment or Excess Amount is received. No inference should be drawn from this revenue procedure as to whether or not other treatments of Payments or Excess Amounts may be appropriate. This revenue procedure is effective with respect to Payments or Excess Amounts received before January 1, 2010, by a Money Market Fund to which this revenue procedure applies."
