This document summarizes the key aspects of mutual fund reorganizations under U.S. tax law. It discusses the general tax rules for reorganizations and the types of reorganizations allowed under Section 368. It then focuses on specific issues like limitations on capital loss carryovers under Sections 381-384 that must be considered to ensure tax-free treatment of the transaction. Examples are provided to illustrate how to calculate limitations on utilization of losses, including limitations related to ownership changes and built-in gains/losses.

1. MUTUAL FUND REORGANIZATIONS Presented by Vito Fronda Murray Goldsmith August 13, 2003 

9. Existence of Reorganization Plan A copy of the plan must be included as part of each party’s federal income tax return for the year of reorganization

10. Carryover Provisions § 381-384 Limitation on use of carryover attributes from the acquired fund could apply.

13. Consequences of a Tax- Free Merger Continued The utilization of loss carryforwards and built-in-losses are limited where a fund incurs a change in ownership. If either fund has built-in-gains at the date of the reorganization, additional limitations may apply.

20. §381 Limitation Calculation The use of the capital loss carryover in the first taxable year ending after the merger is limited to the following under §381: Acquiring fund’s net capital gain The number of days in the year (without regard to any short term after the date of merger capital loss carryover) for the first X ----------------------------------------- taxable year ending after the date The total number of days in of the merger taxable year.

21. Example #1 - §381 Fund A and Fund B - both calendar year end funds. Fund A (acquired fund) merged with Fund B (acquiring fund) on September 15, 1999. The net capital gains and losses of each fund are as follows: Fund A Fund B Taxable Year: 1997 $(1,000,000) $250,000 1998 500,000 250,000 Ending 9/15/99 (100,000) N/A 1999 N/A 300,000 --------------- -------------- Total $ (600,000) $800,000

22. Example #1 - §381 Question: What is total capital loss carryover from Fund A which can possibly be used by Fund B? Answer: Only $87,945 ($300,000 x 107/365) of Fund A’s $600,000 capital loss carryover may offset Fund B’s 1999 net capital gain. 107 days is calculated from 9/16/99 through 12/31/99. The remainder of the Fund A’s capital loss carryover may be utilized in future taxable years, subject to the §382/383/384 limitations.

26. Short Year §382 Limit Calculation In the year of change, the § 382 limit is: No. of days after merger through Annual § 382 limit x end of acquiring fund’s fiscal year Total number of days in acquiring fund’s fiscal year

29. §382 Unrealized built-in-gains/losses (“BIG” or “BIL”) How to Calculate: 1. FMV of assets less adjusted basis of assets equals net unrealized built-in-gains or built-in- losses. 2. Compare to the lesser of: a. 15% of FMV of assets, or b. $10,000,000 3. If 1 is not greater than 2, net unrealized built-in-gains or built-in-losses are de minimis & deemed to be zero. 4. If 1 is greater than 2, then the fund has net unrealized built-in-gains (“BIG”) or built-in-losses (“BIL”) equal to the amount calculated in 1 above.

30. §382 Unrealized built-in-gains/losses (“BIG” or “BIL”) Note that recognized built-in-gains and losses are calculated on an asset by asset basis when determining their impact on these limitations, although the initial calculation regarding whether the unrealized built-in gain/loss exceeds the de minimis amount is done on an aggregate basis.

33. §382 - Notes to Prior BIL Example: (a) - Fund has a net unrealized built-in-loss of $5,000 so only the sale of securities with unrealized built-in-loss as of the merger date (i.e., Securities B & C) can generate recognized built-in loss upon sale. (b) - Fund can recognize built-in loss on the sale of a security only to the extent of unrealized built-in-loss on the security as of the merger date.

34. §382 - Notes to Prior BIL Example Continued: (c) -The total amount of built-in gains or losses that a fund can recognize is limited to the amount of the net unrealized built-in gain or loss as of the merger total, this amount is limited to $5,000 (the amount of net unrealized built-in-losses as of the merger date.)

41. Answer to Example #4 - §382 and 383 Con’t This limitation will apply to recognized built-in losses only to the extent the losses do not exceed the net unrealized built-in losses at the time of the merger, reduced by the recognized built-in losses for prior taxable years.

42. §384 Discussion Provides that if either fund that is a party to the merger has a net unrealized built-in gain at the date of the merger, income to the extent attributable to recognized built-in gains for the 5 year period beginning on the date of merger shall not be offset by any pre-acquisition loss of the other fund. (Note: pre-acquisition loss can be CLCO, net unrealized built-in-loss, or possibly POL)

44. Answer - §384 Fund B net realized gain for 1999 $1,000,000 Add: Built-in losses from Fund A recognized in 1999 100,000 Gross Gains: $1,100,000 Less: Realized built-in gain that cannot be offset by Fund A’s pre-acquisition losses. $1,000,000 Capital gain that may be offset by Fund A preacquisistion losses (Section 384) - - - (1) $ 100,000 ----------- Fund A loss limitation under Sections 382/ 383 (Example #2) - - - (2) 120,000 Loss allowable (lesser of 1 or 2) 100,000 Net capital gain for 2000 $ 1,000,000 --------------