Treasury Department Tax Simplification Proposals

Washington, DC, April 16, 1997 - The Treasury Department has announced its package of proposals for simplifying the Internal Revenue Code, most of which were not included in the Clinton Administration's budget proposal released in February. Several proposals of particular interest to regulated investment companies (RICs) and their shareholders are summarized below.

Two tax simplification measures supported for several years by the Institute have been included in the Administration's package. First, the Treasury Department has proposed that shares of "marketable" passive foreign investment companies (PFICs) be marked to market. (The Treasury Department's summary does not define "marketable" PFICs. Previous versions of this proposal have treated as eligible for mark-to-market treatment all PFIC shares held by RICs.) This proposal would codify the industry's practice of marking PFICs to market each year to eliminate a RIC-level tax that otherwise would apply with respect to the PFICs.

Second, the Treasury Department has proposed that investors who pay foreign taxes (including taxes deemed paid by RIC shareholders pursuant to Section 853) totaling less than $300 ($600 on a joint return) during a year, all of which are reported on Forms 1099, may claim credits against US tax for these amounts by reporting them directly on their IRS Form 1040 income tax returns, rather than first being required to complete a separate, detailed form (IRS Form 1116) used to establish eligibility for the credits. This proposal expands upon the Institute's original proposal and bills introduced in prior Congresses, the most recent of which limited the proposed benefits to investors with foreign tax credits of less than $200 ($400 on a joint return).

Another proposal relating to claims for foreign taxes would deny credits for foreign taxes paid by an investor with respect to dividends (including foreign taxes deemed paid by a RIC shareholder pursuant to Section 853) unless the taxpayer held the stock, in general, for at least 15 days. Any taxpayer who failed to satisfy the holding period requirement would be allowed a deduction equal to the amount of any foreign tax credits disallowed by operation of the holding period requirement.

The Treasury Department also has proposed to eliminate the requirement, imposed by Section 864(b) and the so-called "ten commandment" regulations of Treas. Reg. Section 1.864-2(c)(2)(iii), that certain foreign persons (including certain offshore investment funds) who buy and sell US securities establish their "principal office" outside the US to avoid being treated as engaged in a US trade or business. According to the Treasury Department, the primary current impact of the principal office requirement is to shift certain administrative jobs to foreign tax haven jurisdictions, and to limit the business opportunities of US investment managers by increasing the costs of organizing and operating US-based investment funds.