House Approves Capital Gains Technical Correction

Washington, DC, September 28, 1998 - Following approval by the Ways and Means Committee, the House of Representatives has passed H.R. 4579, the "Taxpayer Relief Act of 1998" by a vote of 229-195. Among other changes, the bill includes a technical correction relating to the tax treatment of capital gains distributions to mutual fund shareholders.

In a law enacted this summer, the Internal Revenue Service Restructuring and Reform Act of 1998, the Congress reduced the top rate on most long-term capital gains from 28 to 20 percent, effective for assets disposed of after December 31, 1997. For mutual funds, the effective date relates only to assets sold by the fund after December 31, 1997. Consequently, under the new law, some of the gains realized by a mutual fund in November and December 1997, but distributed to shareholders in 1998, would be taxed at a 28 percent rate.

Congress did not intend that gains received by mutual fund shareholders in 1998 be subject to a 28 percent rate. The bill approved by the Ways and Means Committee includes a technical correction that generally would apply the effective date of the capital gains reduction to when the mutual fund shareholder received the distribution. Thus, long-term capital gains received by mutual fund shareholders in 1998 would not be taxed at a 28 percent rate.

President Clinton has indicated he plans to veto the legislation in its current form, but it is possible that certain provisions of H.R. 4579 may be enacted in other legislation.