In a February 13, 2012 post, we introduced the topic of Fund Restructuring and noted a number of ways in which a mutual fund could restructure itself to better align with today’s marketplace. In this post, we will touch on some of the operational issues relating to fund mergers. Tax considerations will be discussed in a future post, but it should be noted that one of the most significant challenges from an operational standpoint is ensuring coordination between operational and tax issues.

UPDATE TO ORIGINAL POST: Contrary to prior rumors in the industry, the IRS did issue a revised Form 8613 before March 15, which is currently available on the IRS Web site.

In a previous post, we took a look at the technical requirements of the asset diversification tests that a fund must pass in order to qualify as a regulated investment company (“RIC”) for federal income tax purposes. In this post, we will dive deeper into these rules by looking at a case study of a “close call” for a fund that on the surface would appear to have failed the test. We will examine in depth one of the important exceptions to a mutual fund diversification test failure.

There has been much movement in the mutual fund industry recently in terms of fund restructuring.

As many portfolio managers are familiar with the concept of harvesting losses in an effort to be as tax efficient as possible, the idea of harvesting gains probably sounds strange. However, fiscal year 2012 may be a year where it is more tax efficient for regulated investment companies to harvest gains instead of losses. In December 2010, the Regulated Investment Company Modernization Act of 2010 (the “Act”) was passed into law to much fanfare from the industry. Most provisions of the Act are effective for fiscal years beginning after the date of enactment, which in most cases starts with fiscal years ending December 31, 2011 and beyond. One of the beneficial provisions of the Act was the elimination of the expiration of the carry-forward of losses realized in fiscal years beginning after the date of enactment. Pre-enactment losses remained subject to expiration. One tiny little detail of the Act that is not frequently discussed is that, although post-enactment losses are no longer subject to expiration, they must be utilized before a fund can utilize any pre-enactment losses, which are subject to expiration. Therefore, there is now a greater likelihood that pre-enactment losses will expire worthless, depriving the fund and its shareholders the benefits of tax loss harvesting prior to December 2010.

There are different scenarios in which an investment company invests in another investment company (registered or unregistered)— master-feeder fund structures; funds of funds; investment companies that happen to be invested in another fund but aren’t necessarily funds of funds. Within each of these scenarios, a fund must consider the appropriate financial statement presentation relating to these investments considering the significance of the investment.

In order to avail itself of the favorable tax treatment afforded to a “regulated investment company” or “RIC," a fund must meet the following requirements:

In this, our fourth and final post concerning the tax consequences associated with covered call writing, we will present examples that are intended to illustrate and build upon the principles discussed in the previous posts in this series. Unless otherwise noted, the examples all are based on the fact pattern described below:

As we continue to explore the tax consequences associated with covered call writing, we turn to certain collateral issues related to the straddle rules. Namely, the effect on the “holding period” of the underlying stock for tax periods and its effects on the character of the gain or loss on the sale of that stock and the ability to qualify dividend income on that stock for certain tax favored treatment.

In our last post, we examined the basics of the straddle rules, including the definition of a straddle and loss deferral rules associated with a straddle. In this post, we will look at an important exception to the straddle rules.