Law firm Stradley Ronon encapsulated the recent IRS/US Treasury final ruling to simplify accounting for floating NAV money market funds in the latest issue of its "Tax Insights" newsletter. (See our July 8 News, "IRS Finalize MMF Acctg Rules; July MFI Features Prime Drop, Novick.") The Stradley piece, which we excerpt from below, adds further insight. We review this and also excerpt from a press release entitled, "Capital Advisors Group and StoneCastle Partner to Deliver Capital Advisors Group Insured Liquidity Accounts." (Note: We also corrected our article from Friday, which initially had some Morgan Stanley strike times wrong. See the revised version here or see Morgan Stanley's announcement here.)
The Stradley Ronon article, entitled "IRS and Treasury Issue Final Regulations on NAV Method of Accounting Relating to MMF Reform," explains, "The IRS and Treasury issued final regulations (TD 9774) under Sections 446 and 6045 (section references are to the Internal Revenue Code of 1986, as amended) providing a method of accounting for gain or loss on shares in a money market fund (MMF). The rules are intended to simplify tax compliance for holders of shares in MMFs affected by SEC regulations that impose liquidity fees or change how certain MMF shares are priced. The regulations also provide guidance regarding information reporting requirements for shares in MMFs."
It tells us, "The Treasury Department and the IRS published proposed regulations (REG-107012-14) on July 28, 2014, describing a simplified method of accounting for gain or loss on shares in a floating NAV (F-NAV) MMF (the net asset value method, or NAV method). Under the NAV method, a taxpayer's gain or loss on shares in an MMF is based on the change in the aggregate value of the taxpayer's shares during a computation period selected by the taxpayer and on the net amount of the purchases and redemptions during the computation period."
Stradley Ronon continues, "The proposed regulations also provided guidance regarding information reporting requirements for shares in MMFs, revising Treasury Regulations Section 1.6045-1(c)(3)(vi). The Treasury Department and the IRS modified the proposed regulations regarding the NAV method, as further described below, and adopted the proposed regulations regarding information reporting without substantive change. The NAV method regulations apply to taxable years ending on or after July 8, 2016, and the information reporting regulations are applicable to sales of shares in calendar years beginning on or after July 1, 2016."
They offer a "Summary of Revisions," saying, "The IRS and Treasury received a number of comments in response to the proposed regulations and, as a result, have made revisions to proposed regulations as follows: Taxpayers are permitted to apply the NAV method to shares in stable-NAV (S-NAV) MMFs. MMF shareholders are permitted to use different methods of accounting for shares in different MMFs or for shares in a single MMF held in different accounts.... The final regulations also clarify how a RIC may change to or from the NAV method."
The Summary continues, "The fair market value (FMV) of a share in an MMF at the time of a transaction is presumed to be the published NAV (or other published amount for which the MMF would redeem the share, determined without regard to any liquidity fees (other redemption amount)). For purposes of computing the ending value for a computation period, the presumption applies to the last published NAV (or other redemption amount) in that computation period. The final regulations include provisions for determining the amount received for purposes of computing a taxpayer's net investment in an MMF for a computation period."
It adds, "The final regulations do not make any changes regarding MMF accounts with shares of a mixed character. The proposed regulations provide that if a taxpayer uses the NAV method for shares in an MMF and each of those shares otherwise would give rise to capital gain or loss if sold or exchanged in a computation period, then the gain or loss from the shares in the MMF is treated as capital gain or loss under the NAV method. Likewise, if each of the shares otherwise would give rise to ordinary gain or loss if sold or exchanged in a computation period, then the gain or loss is treated as ordinary gain or loss."
Stradley's Summary concludes, "The IRS and Treasury also received a comment requesting Treasury and the IRS to issue guidance (1) setting forth the proper tax treatment by an MMF of liquidity fees that the MMF imposes and (2) providing that if an MMF imposes liquidity fees and subsequently distributes to shareholders amounts that correspond to amounts that the MMF retained as liquidity fees, the MMF will be deemed to have sufficient earnings and profits to treat the distribution as a dividend. Since these requests were unrelated to the NAV method or to the information reporting provision in the proposed regulations, they were not addressed in the final regulations, but Treasury and the IRS might consider guidance on those questions in the future." The piece continues to offer a more "Detailed Explanation of Revisions."
In other news, a press release says, "Capital Advisors Group, Inc. announced the launch of the Capital Advisors Group Insured Liquidity Accounts in partnership with StoneCastle Cash Management, LLC. By utilizing StoneCastle's Federally Insured Cash Account (FICA) platform, the new Capital Advisors Group Insured Liquidity Accounts will have access to deposit insurance, backed by the full faith and credit of the U.S. Government, on up to $60 million in deposits with next-day liquidity."
Ben Campbell, CEO and founder of Capital Advisors Group, comments, "Institutional cash managers who face regulatory and market uncertainty from banking and money market fund reforms are seeking alternatives to prime money funds and traditional bank deposits. Capital Advisors Group's partnership with StoneCastle will enable us to provide Capital Advisors Group Insured Liquidity Accounts, which are designed to help clients meet their objectives of safety of principal, liquidity and competitive yield." Capital Advisors Group also offers "Liquidity Accounts, Intermediate Accounts and one- to three-year accounts, providing cash managers with a range of custom separately managed account investment solutions."
Steve Rotella, CEO of StoneCastle Cash Management, adds, "We are delighted that Capital Advisors Group is integrating StoneCastle's FICA program into its family of separately managed account services. With post-crisis reforms changing the risk and liquidity profiles of major banks and money market funds, Capital Advisors Group clients may be able to meet their liquidity needs and realize competitive returns with a potentially safe and secure alternative to bank deposits and money market funds."
Finally, the release explains, "StoneCastle's FICA is an account that deposits client cash throughout StoneCastle's network of hundreds of screened financial institutions. The FICA program satisfies the FDIC's requirements for agency pass-through deposit insurance coverage. Although FICA is not a member of the FDIC, the banks where client money is deposited are FDIC members, providing deposit insurance backed by the full faith and credit of the U.S. Government."
