Only one comment letter has been posted so far in response to the Treasury and IRS's Proposed Rule on "Money Market Funds: Method of Accounting for Gains and Losses on Shares and Broker Returns with Respect to Sales of Shares," which accompanied the SEC's July Money Fund Reforms. A letter from the Investment Company Institute is the only post so far, though the deadline was Monday, Oct. 27 (so we could see more posted in coming days). The proposal by the U.S. Department Treasury and IRS to allow floating NAV money market fund investors to use a simplified tax accounting method to track gains and losses and provide relief from the "wash sale" rules for any losses on shares of a floating NAV money market fund. As we wrote in our July 30 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal," this proposal sealed the deal for the passage of money market reform as SEC Commissioner Daniel Gallagher, who turned out to be the swing vote, said he would not have voted in favor without this assurance from the Treasury and IRS. (Gallagher commented at the time, "I have consistently, loudly, and publicly stated that my vote for a floating NAV was contingent on the resolution of the tax and accounting-related issues arising from the move away from a constant NAV.")

In the ICI letter, Karen Lau Gibian, senior associate counsel, Tax Law, offered support for the proposal, with some recommendations to improve it. She says, "Although we have a few recommendations, we generally believe that this guidance provides a workable tax accounting method for shareholders in floating NAV money market funds. We especially appreciate the Treasury Department and IRS's commitment to providing guidance on these issues in a timely fashion."

She then details the recommendations. "The Institute recommends three changes to the "NAV method" in the proposed regulations. First, shareholders should be permitted to use the NAV method on an account-by-account basis. Second, the NAV method should be available for shareholders in stable NAV money market funds that charge a liquidity fee. Third, the IRS and the Treasury Department should confirm that a regulated investment company (RIC) is permitted to use the one-year period from November 1 to October 31 as its "computation period" for purposes of the excise tax. The Institute also asked the IRS to extend the wash sale exemption in Rev. Proc. 2014-45 to stable NAV funds that impose a liquidity fee."

The letter continues, "In addition to the guidance already released, the Institute asks the IRS and Treasury Department to provide guidance regarding the tax implications to funds and shareholders if a stable NAV fund imposes a liquidity fee. First, the government should clarify that a money market fund may treat the liquidity fee as "paid-in capital," resulting in no gain or income, and that shareholders should treat the liquidity fee as a reduction in gross proceeds. We also ask the government to provide that a stable NAV RIC that pays out liquidity fees will be deemed to have sufficient earnings and profits to make the distribution a dividend under section 301, to the extent the distribution otherwise would be a return of capital. Finally, the Institute asks the Treasury Department and the IRS to provide guidance permitting a money market fund that separates existing institutional and retail classes into standalone funds, in order to comply with the SEC Rule, to treat such transaction as a tax-free reorganization under section 368."

Gibian adds, "The Institute asks the Treasury Department and the IRS similarly to provide guidance making it easier for money market funds to separate existing classes into separate retail and institutional funds. Specifically, we ask the government to provide that this type of "split-off" transaction will be treated as a tax-free reorganization under section 368(a)(1)(D). Absent this type of guidance, a fund complex that wishes to maintain a stable NAV fund for retail shareholders of an existing fund may have to engage in one or more transactions that triggers gain/loss recognition, as well as restarted holding periods. Given that the sole reason for splitting up the existing fund into two separate funds is to adjust the fund's shareholder base so that retail and institutional are treated as intended by SEC Rule, we do not believe it would be appropriate for a transaction in these circumstances to trigger tax consequences to the fund or the shareholders. This could harm investors duly."

Treasury's original proposal explained, "In response to concerns regarding the tax compliance burdens associated with frequent redemptions of shares in floating-NAV MMFs, these proposed regulations describe a permissible, simplified method of accounting for gain or loss on shares in a floating-NAV MMF (the net asset value method, or NAV method). The NAV method, in the opinion of the Commissioner of Internal Revenue, is a method of accounting that clearly reflects income from gain or loss on shares in floating-NAV MMFs. Under this method, gain or loss is based on the change in the aggregate value of the shares in the floating-NAV MMF during a computation period (which may be the taxpayer's taxable year or certain shorter periods) and the net amount of the purchases and redemptions during the period. More specifically, the taxpayer's net gain or loss from shares in a floating-NAV MMF for a computation period generally equals the value of the taxpayer's shares in the MMF at the end of the period, minus the value of the taxpayer's shares in the MMF at the end of the prior period, minus the taxpayer's net investment in the MMF during the period. The NAV method does not change the tax treatment of, or broker reporting requirements for, dividends from floating-NAV MMFs. The proposed method simplifies tax computations by basing them on the aggregate of all transactions in a period and on aggregate fair market values. Every floating-NAV MMF must compute these fair market values for non-tax purposes regardless of how -- or even whether -- the MMF's shareholders are taxed on transactions in the MMF shares. The NAV method takes into account changes in value of floating-NAV MMF shares without regard to realization."

In addition to its comment letter, ICI said it wanted to speak at the public hearing on the proposed regulations, scheduled for November 19. The public hearing will be held in the IRS Auditorium, Internal Revenue Building, 1111 Constitution Avenue NW., Washington, DC.

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