Sign up today and take advantage of member-only content — the kind of timely, cutting edge industry insight that only Money Management Executive can deliver.
  • Exclusive Online Only Content
  • Free Daily Email News Alerts
  • Asset Management Blogs

Fund Launch Costs Receive Low Priority


The Internal Revenue Service has denied the request of the Investment Company Institute of Washington, D.C. to include the tax treatment of fund launch costs in its 2001 Priority Guidance Plan to finally resolve the issue. The ICI still hopes the issue will be considered this year, but it is clear that since the IRS left it out of its business plan, it is not one of its top priorities.

In February, Keith Lawson, senior counsel with the ICI, sent a letter to the IRS requesting that the treatment of fund start-up costs be included in the IRS plan. The plan is released annually by the IRS and Treasury Department and lists the initiatives that will receive attention first in the next year. The ICI and the IRS have disagreed on the matter of fund launch costs throughout much of the 1990s, according to John Collins, a spokesperson for the ICI. The disagreement is whether the costs, particularly internal costs, of starting up a fund, should be deductible or capitalized and to what degree, he said.

"The mutual fund industry players that start up funds have held and continue to hold that the expenses involved in starting up a mutual fund should be generally deductible," said Collins. "The IRS position since the mid-90s has been that they prefer to have the tax treatment through amortization so that costs involved in a start up would be capitalized and then amortized over a period of years. It's still up in the air how that's going to be resolved."

In November 1999, the ICI suggested that the IRS change the amortization period for fund start-up costs from 15 years to five years, according to the ICI letter. A resolution was in the works. However, the conditions the ICI then found acceptable are no longer acceptable, according to the ICI letter. While then the ICI would have accepted a shortened amortization period, it now wants to be able to write off the costs right away, the letter said.

There are two reasons for the change in position, according to the letter. First, two appeals courts reversed decisions requiring capitalization, which the IRS had originally won against PNC Bancorp of Pittsburgh and Wells Fargo of San Francisco last year, according to the letter. Also, recent comments by various government officials regarding forecasts of future guidance, including the deductibility of certain internal costs, have swayed industry sentiment, according to the letter.

"In light of these developments, many find industry professionals now doubt that a significant portion of the industry would elect into industry-wide guidance ... unless the guidance required less capitalization, particularly with respect to internal mutual fund launch costs, than would have been required under our 1999 submission," the letter said. "Because of our strong interest in working with you to resolve this industry-wide issue, we urge that the mutual fund launch cost issue be included on the 2001 business plan."

The plan, which was released by the IRS on April 26, did not include the issue as a separate priority. Still, the ICI does not believe that is an indication that the issue will not be dealt with at all during the next year, according to Collins.

"The way it's being looked at around here is that it doesn't necessarily mean it's not being given any work or consideration," said Collins. "It's quite possible that they can be working on an issue that's specific to the mutual fund industry in the context of other start-up cost issues, and so they may indeed be working on it without having put it as a separate item."

It is very difficult to say why something might not have been included in the plan, according to Arturo Estrada of the office of chief counsel, financial institutions and products at the IRS. The plan is used as a guideline by the service, however it is by no means set in stone, he said.

"Typically, it's not a decision not to include something as much as a matter of which ones we can focus on in a given year," said Estrada. "Also, a number of topics not officially on the business plan will nonetheless be dealt with. The business plan consists of our highest priorities. However, if history is any guidance, some of these projects will expand and go beyond what the initial description is, depending on what is necessary to come up with a complete package."

Proposals for guidance were reviewed by the published guidance advisory committee, which includes officials from both the IRS and the Treasury's office of tax policy, according to the plan. Many people from both offices make suggestions as to what proposals should be included, according to Estrada.

"It seems like a little bit of a sloppy process, but it's the best way we've found of ensuring no one group, not the service, not the Treasury, not the commissioner, simply dictates the projects," said Estrada. "We get a great number of letters suggesting projects and all these go into the pot."

The ICI will continue to press the IRS to come to a resolution on the matter, according to Collins.

"The only way we know how is just to keep putting the question to the IRS," he said.