SEC Investment Management FAQ: Mutual Fund After-Tax Return Requirements

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The staff of the Division of Investment Management has prepared these responses to frequently asked questions about the new mutual fund after-tax return rule and form amendments. These amendments require mutual funds to disclose in their prospectuses after-tax returns based on standardized formulas comparable to the formula currently used to calculate before-tax average annual total returns. The amendments also require certain funds to include standardized after-tax returns in advertisements and other sales materials. The adopting release for the after-tax return requirements can be found at www.sec.gov/rules/final/33-7941.htm .

Many of the questions that the Division has received involve the tax treatment of distributions, redemptions, and other events that must be considered in calculating after-tax returns. The responses to these questions generally follow the applicable federal tax law. In addressing similar questions that arise in calculation of after-tax returns, funds and third-party providers should consult and apply the tax law in effect for each period for which after-tax returns are calculated.

These responses represent the views of the staff of the Division of Investment Management. They are not a rule, regulation, or statement of the Securities and Exchange Commission. Further, the Commission has neither approved nor disapproved this information.

Tax Rates

Question 1

Q. What are the applicable federal individual income tax rates for calculating after-tax returns?

A. The following chart lists the applicable federal individual income tax rates for the years 1985 through 2001.

Beginning of Period for which Effective

Ordinary Income/ Short-Term Capital Gain Rate

Long-Term Capital Gain Rate Mid-Term Capital Gain Rate (effective for July 29, 1997, through Dec. 31, 1997, for investments held for more than 1 year but not more than 18 months)

Section 1250 Gain Rate

Jan. 1, 1985

50.0%

20.0%

Not applicable

Not applicable

Jan. 1, 1987

38.5%

28.0%

Jan. 1, 1988

28.0%

Jan. 1, 1991

31.0%

Jan. 1, 1993

39.6%

May 7, 1997

20.0%

25.0%

July 29, 1997

28.0%

Jan. 1, 1998

Not applicable 1

Jan. 1, 2001

39.1%

Question 2

Q. What are the applicable federal corporate tax rates for calculating the impact of undistributed capital gains on after-tax returns?

A. The following chart lists the applicable corporate tax rates for the years 1985 through 2001. See Question 9, below, for the treatment of undistributed capital gains.

Beginning of Period for which Effective

Corporate Tax Rate

Jan. 1, 1985

46.0%

July 1, 1987

34.0%

Jan. 1, 1993

35.0%

Question 3

Q. Should after-tax returns always be calculated using the highest rate applicable to any federal income tax bracket?

A. Generally, yes. Instruction 4 to Item 21(b)(2) of Form N-1A and Instruction 4 to Item 21(b)(3) of Form N-1A provide that taxes due on distributions are to be calculated using the "highest individual marginal federal income tax rates." Instruction 7(d) to Item 21(b)(3) of Form N-1A provides that capital gains taxes upon redemption are to be calculated using the "highest federal individual capital gains tax rate for gains of the appropriate character."

However, Instruction 4 to Item 21(b)(2) of Form N-1A and Instruction 4 to Item 21(b)(3) of Form N-1A also provide that the effect of phaseouts of certain exemptions, deductions, and credits at various income levels should be disregarded. As a result, there may be circumstances where the highest rate applicable to any federal income tax bracket is not used because that rate reflects the phaseout of certain exemptions, deductions, and/or credits. For example, the Tax Reform Act of 1986 created two tax brackets, 15% and 28%, with a 5% surcharge designed to phase out the effect of the 15% rate and personal exemptions for upper income households. The 5% surcharge created a "bubble" rate of 33% on income at certain levels, with the rate dropping back to 28% on income above the level where the phaseout was complete. As reflected in the chart in Question 1, a 28% rate rather than a 33% rate should be used for the affected years (1988-1990).

Question 4

Q. When should the lower capital gains rate for qualified five-year gains enacted by the Taxpayer Relief Act of 1997 be incorporated into the after-tax return calculation?

A. For taxpayers in the 20% bracket for long-term capital gains, the qualified five-year gain rate (18%) applies to assets purchased on or after January 1, 2001 (or assets held on January 1, 2001, and subject to a special election to recognize gain on the assets ("mark to market election")) and held for more than five years. 2 Therefore, the 18% rate will not apply until such assets are sold beginning in January 2006. The 18% rate would apply to any distributions designated by the fund as qualified five-year gains on Form 1099-DIV beginning in January 2006, as well as to redemptions of shares purchased on or after January 1, 2001, (or subject to the mark to market election) and held for more than 5 years prior to redemption starting in January 2006. For purposes of the after-tax return calculation, a fund should assume that a shareholder did not elect to mark to market (and recognize gain upon) any shares held on January 1, 2001. Thus, in computing after-tax returns, the 18% rate should not be applied to gains from the redemption of shares purchased prior to January 1, 2001.

Capital Gains And Losses; Reinvested Dividends; Cost Basis

Question 5

Q. How should the capital gain and loss netting rules be applied in computing return after taxes on distributions and redemption of fund shares?

A. Instruction 7(d) to Item 21(b)(3) of Form N-1A provides in part that "applicable federal tax law should be used to determine whether and how gains and losses from the sale of shares with different holding periods should be netted, as well as the tax character ( e.g., short-term or long-term) of any resulting gains or losses. Assume that a shareholder has sufficient capital gains of the same character from other investments to offset any capital losses from the redemption so that the taxpayer may deduct the capital losses in full."

In calculating the capital gains taxes (or the benefit resulting from tax losses) on a redemption of fund shares, the federal tax law netting rules should first be applied to losses and gains from the sale of fund shares. A fund should only assume that a shareholder has sufficient gains of the same character from other investments to offset any capital losses from the redemption after the fund has netted all gains and losses from the sale of fund shares. Thus, the netting rules should be applied as follows:

Calculate the gain or loss for each lot sold, identifying lots by their appropriate holding periods ( e.g. , short-term, long-term, or 5-year gain under current tax law).

Compute net long-term capital gain or loss by combining long-term gains and long-term losses from the sale of all lots held for more than one year. 3

Compute net short-term capital gain or loss by combining short-term gains and short-term losses from the sale of all lots held one year or less. 4

Determine appropriate tax treatment as follows:

If netting results in net long-term capital gain and net short-term capital gain, tax net long-term capital gain at long-term capital gain rate; tax net short-term capital gain at short-term capital gain (ordinary income) rate. 5

Combine net short-term capital gain and net long-term capital loss. If result is greater than zero, tax amount at short-term capital gain (ordinary income) rate. If amount is less than zero, determine benefit resulting from tax loss using long-term capital gain rate. 6

Combine net short-term capital loss and net long-term capital gain. If result is greater than zero, tax amount at long-term capital gain rate. 7 If amount is less than zero, determine benefit resulting from tax loss using short-term capital gain (ordinary income) rate. 8

If netting results in net long-term capital loss and net short-term capital loss, determine benefit resulting from net long-term capital loss using long-term capital gain rate and determine benefit resulting from net short-term capital loss using short-term capital gain (ordinary income) rate. 9

In order to simplify the after-tax return calculation, capital gain dividends to shareholders should be excluded from the determination of net gains and losses on redemption.

Example 1. Assume that a fund distributes a $100 long-term capital gain dividend which is reinvested on June 30 and a shareholder realizes a $50 net long-term capital loss (but no short-term capital gain or loss) on redemption on December 31. Under 5, above, the June 30 $100 long-term capital gain dividend would not be netted with the December 31 $50 net long-term capital loss. Therefore, on June 30, the shareholder is deemed to have reinvested $80 in new shares ($100 capital gain dividend less $20 capital gains taxes assuming a 20% tax rate). In addition, under 4(d), above, the fund would determine the benefit resulting from the $50 net long-term capital loss on December 31 using the long-term capital gain rate.

Example 2. Assume that a fund distributes a $100 long-term capital gain dividend which is reinvested on June 30 and a shareholder realizes a $50 net long-term capital gain and a $100 net short-term capital loss on redemption on December 31. As in Example 1, above, on June 30 the shareholder is deemed to have reinvested $80 in new shares ($100 capital gain dividend less $20 capital gains taxes, assuming a 20% tax rate). Under 4(c), above, the fund would offset $50 of the $100 net short-term capital loss on redemption against the $50 net long-term capital gain on redemption. The benefit resulting from the remaining $50 net short-term capital loss would be determined using the short-term capital gain (ordinary income) rate and taken into account on December 31.

Question 6

Q. What method should be used to adjust the tax status of prior distributions and reduce the cost basis of shares where a fund distributes a non-taxable return of capital?

A. For purposes of the after-tax return calculation, a fund must allocate a return of capital distribution to prior distributions made by the fund in the same manner that the return of capital is reported to shareholders on IRS Form 1099-DIV. Returns of capital are non-taxable distributions, and a fund should assume that no taxes are paid by a shareholder on returns of capital. 10 In addition, a shareholder must reduce the basis in fund shares to the extent that the shareholder receives distributions treated as tax-free returns of capital. 11 The allocated return of capital should ratably reduce the basis of all shares to which it relates. Where a portion of a distribution is treated as a return of capital, the reinvested amount of the distribution should reflect the fact that no tax is due on the return of capital.

Question 7

Q. When should the effect of taxes be taken into account for dividends declared to shareholders of record on a specified date that are not immediately reinvested in additional fund shares? This situation may arise, for example, where a fund declares dividends daily but reinvests (and pays) them only monthly.

A. Where a dividend has been both declared and reinvested in additional fund shares prior to the end of the measurement period, the effect of taxes on the dividend should be taken into account on the date that the dividend is reinvested. 12 Where a dividend has been declared to shareholders of record but not reinvested in additional fund shares prior to the end of the measurement period, the effect of taxes on the dividend should be taken into account on the final day of the measurement period.

Question 8

Q. Are shares acquired with reinvested dividends given cost basis equal to the reinvested amount ( i.e., specific identification) or are those shares deemed to have average cost basis (particularly if the fund complex provides average cost information to its shareholders)?

A. The instructions for computing after-tax return provide that a fund should separately track the basis of shares acquired through the initial investment and each subsequent purchase through reinvested distributions. In determining the basis for a reinvested distribution, a fund should include the distribution net of taxes assumed paid from the distribution. 13 Thus, all shares have a cost basis equal to the amount invested (on the date of initial investment or the date of reinvestment), as if the shareholder uses the specific identification method of determining cost basis. For example, if a dividend of $80 (net of taxes) is reinvested, the cost basis of the shares acquired is $80.

Question 9

Q. How should the after-tax impact of capital gains be calculated if the fund decides to retain them (rather than distribute them as a capital gain dividend)?

A. Federal tax law provides that every shareholder of a fund at the close of the fund's taxable year must include long-term capital gains retained by the fund and designated as undistributed capital gains in the shareholder's income tax return for the taxable year in which the last day of the fund's taxable year falls. 14 In addition, the shareholder is deemed to have paid the tax imposed on the fund with respect to the undistributed gains and is allowed a credit or refund for this tax. 15 Finally, the shareholder's basis in his or her shares is increased by the difference between the amount of the includible gains and the tax deemed paid by the shareholder. 16

Thus, under federal tax law, if a fund has a June 30 taxable year and retains long-term capital gains of $10.00 per share, every shareholder in the fund on June 30 is treated as having long-term capital gains of $10.00 per share resulting in a tax payable of $2.00 per share (assuming the maximum long-term capital gains rate of 20%), as having paid tax of $3.50 per share (assuming the fund paid tax at a rate of 35%), and as having $6.50 of additional basis in each share (the difference between $10.00 in gains and the $3.50 tax deemed paid by the shareholder).

For purposes of the after-tax return calculation, the fund shareholder should be treated as reinvesting an additional $1.50 per share on June 30. Specifically, since the tax payable by the shareholder is $2.00, $8.00 per share is the portion of the $10.00 per share amount that should be treated as remaining in the fund ($10.00-$2.00). Moreover, since the fund has paid tax of $3.50 per share on the retained gain of $10.00 per share, even though the shareholder's tax liability on this gain is only $2.00 per share, the excess tax payment ($1.50 per share) is available to offset other tax liabilities. Consequently, a reinvestment is required to add $1.50 per share to the $6.50 per share of the $10.00 retained gain per share that remains to reflect this tax benefit. This treatment should occur on the last day of the fund's taxable year.

Question 10

Q. Internal Revenue Code Section 852(b)(4) provides special rules regarding losses on the sale of mutual fund shares held for 6 months or less. Specifically, if a taxpayer holds shares of a mutual fund for 6 months or less and then sells the shares at a loss, the taxpayer must report that portion of the loss that is equal to capital gain distributions (or undistributed capital gains) from the shares as a long-term capital loss. In addition, a taxpayer holding mutual fund shares for 6 months or less may not claim any loss on the sale of the shares to the extent that the taxpayer has received any exempt-interest dividend. Should Section 852(b)(4) be applied in calculating after-tax returns?

A: In order to simplify the computation of after-tax returns, funds are not required to apply these provisions in calculating their after-tax returns.

Congress enacted Section 852(b)(4) to prevent taxpayers from purchasing mutual fund shares shortly before distribution of a capital gain or exempt-interest dividend and then quickly selling the same shares at a loss due to the corresponding fall in the fund's net asset value. In this manner, the taxpayer would have received a capital gain distribution taxed at the lower long-term rate or a tax-exempt dividend, while also incurring a short-term loss that could be used to offset other short-term gain. 17

Section 852(b)(4) applies only to fund shares held for 6 months or less, while the after-tax return rules require disclosure of after-tax returns after holding periods of at least one, five, and ten years. Thus, Section 852(b)(4) would be relevant to the calculation of after-tax returns only in the limited circumstances where shares are purchased with reinvested distributions within 6 months prior to the end of the measuring period. These circumstances are different from those contemplated by Section 852(b)(4), which is concerned with the intentional purchase and sale of shares in order to generate short-term losses and long-term capital gains distributions or tax-exempt dividends. Even in the circumstances under which Section 852(b)(4) might apply in calculating after-tax returns, its impact would be limited, affecting the after-tax return figure only by affecting the character of the loss corresponding to the amount of any capital gains or tax-exempt dividend received for shares purchased with reinvested distributions within 6 months of the end of the measuring period. As a result, we believe that systems burdens imposed on funds to reflect these provisions in calculating after-tax returns would outweigh any additional precision that would result.

Foreign Tax Credits

Question 11

Q. How should the after-tax impact of the foreign tax credit be calculated for a fund that either declares dividends or does not declare any dividends during the applicable period?

A. The instructions for computing after-tax returns state that the effect of the foreign tax credit should be taken into account in accordance with federal tax law. 18 As a result, a fund that elects to pass through the foreign tax credit to its shareholders under Code Section 853 must include in the shareholders' gross income for computing taxes the amount of the credit. 19 For example, if a fund pays a cash dividend of $9.00 per share and a $1.00 per share foreign tax credit is being passed through with this dividend, the amount of the dividend is increased to $10.00 per share to reflect the foreign tax credit gross-up. The amount reinvested would be $6.09, which equals the $9.00 cash dividend, less tax of $3.91 on the $10.00 grossed-up dividend (assuming a 39.1% maximum marginal tax rate), plus $1.00 to reflect the benefit provided to the taxpayer by the $1.00 foreign tax credit.

A fund that pays foreign tax but has no net income to distribute nevertheless may be eligible to pass through a foreign tax credit. Such a fund should take the effect of the foreign tax credit into account. For example, if a fund paid foreign taxes equal to $1.00 per share and elected to pass through the foreign tax credit, the fund should make the appropriate adjustments to its after-tax return as of the same date it treats shareholders of record as having received the grossed-up dividend for purposes of Form 1099-DIV. In this example, the amount reinvested would be $0.609, which equals the $0.00 cash dividend, less tax of $0.391 on the $1.00 deemed dividend (at a 39.1% maximum marginal tax rate), plus $1.00 to reflect the benefit provided to the taxpayer by the $1.00 foreign tax credit.

Redemption Fees; Contingent Deferred Sales Loads

Question 12

Q. How should a fund apply redemption fees and contingent deferred sales loads for purposes of the after-tax return calculation?

A. Instruction 2 to Item 21(b)(2) of Form N-1A and Instruction 2 to Item 21(b)(3) of Form N-1A provide that all distributions by a fund, less the taxes due on such distributions, are reinvested at the price stated in the prospectus (including any sales load imposed upon reinvestment of dividends) on the reinvestment dates during the period. Instruction 6 to Item 21(b)(2) of Form N-1A and Instruction 6 to Item 21(b)(3) of Form N-1A provide that in determining the value of an investment at the end of the 1-, 5- or 10-year measuring period, a fund should assume a complete redemption, with the deduction of (i) all nonrecurring charges deducted at the end of the period, and (ii) the maximum sales load at the times, in the amounts, and under the terms disclosed in the prospectus.

Accordingly, a fund should apply redemption fees and contingent deferred sales loads for purposes of the after-tax return calculation in the manner provided in the fund's prospectus. For example, if a fund's prospectus states that redemption fees do not apply to shares purchased through the reinvestment of distributions, such fees should not apply to those shares for purposes of the after-tax return calculation.

Sources of Tax Data

Question 13

Q. What sources should a fund rely upon for historical tax characterizations of distributions and related tax adjustments, e.g. , foreign tax credits? How should a fund determine the historical tax characterizations of distributions if these sources are unavailable?

A. As a general rule, a fund should rely on tax information reported to fund shareholders on IRS Form 1099-DIV and, in the case of tax-exempt distributions, amounts reported for tax purposes to investors on shareholder statements.

For periods prior to the compliance date for the after-tax return requirements, a fund may not be able to obtain the entire Form 1099-DIV history for all or a portion of the fund's existence, such as where a fund has been acquired by an unaffiliated adviser. In these cases, a fund should use reasonable efforts to fill any gaps in the tax history for a fund. It is advisable for funds to retain written explanations describing these efforts. In the absence of Form 1099-DIV history for periods prior to the compliance date for the after-tax return requirements, sources upon which a fund may rely for purposes of characterizing a distribution as other than ordinary income for purposes of the after-tax return calculation include, but are not limited to:

Designations of long-term capital gain distributions in the fund's financial reports;

Designations of capital gain distributions to shareholders under Rule 19a-1, where the designation distinguishes between short-term and long-term gains; and

Board minutes declaring or ratifying long-term capital gain distributions.

If, notwithstanding such reasonable efforts, a fund is unable to recreate the complete tax history for a fund for periods prior to the compliance date for the after-tax return requirements, the taxable amount and tax character of each distribution should be (1) as specified by the fund on the dividend declaration date, where known, or (2) determined using the procedure described in the answer to Question 14, below, if the fund knows the aggregate tax character of distributions made during a year but does not have tax data relating to specific distributions. Where a fund cannot assign a tax character to a distribution using these means, it should characterize the distribution as ordinary income for purposes of the after-tax return calculation.

Question 14

Q. What procedures may a fund use to allocate the tax character of distributions where the fund knows the aggregate tax character of the distributions made during a year but does not have tax data relating to specific distributions?

A. Funds typically maintain records of the tax character of each distribution they make to shareholders. However, where records relating to particular distributions are unavailable for periods prior to the compliance date for the after-tax return requirements, the fund should allocate the various characteristics of the fund's total distributions for the year ratably over the distributions. For example, if 90% of a fund's total distributions for the year were attributable to tax-exempt interest with the remaining 10% attributable to market discount, each distribution would be treated as 90% tax-exempt interest and 10% market discount. Where designation records are available for some distributions, such as capital gain dividends, but not for others, the designations must be used where they are available. Ratable allocations should be made for the remaining distributions for which the tax characterizations are not available.

Question 15

Q. What sources should a third party rely upon for historical tax characterizations of distributions in computing standardized after-tax return for a fund?

A. To compute standardized after-tax return, a third party should rely on tax information provided by the fund complex. Where the third party is unable to obtain the entire tax history for all or a portion of a fund's existence, the third party calculating standardized after-tax return for the fund should treat the tax character and taxable amount of each distribution as specified by the fund on the dividend declaration date or, lacking this information, as ordinary income.

Question 16

Q. What procedures may a fund use to estimate the tax character of current-year distributions where these distributions have not yet been reported on IRS tax forms?

A. Instruction 3 to Item 21(b)(2) of Form N-1A and Instruction 3 to Item 21(b)(3) of Form N-1A provide that "the taxable amount and tax character of each distribution should be as specified by the Fund on the dividend declaration date, but may be adjusted to reflect subsequent recharacterizations of distributions." The Division believes that adjustments to reflect subsequent recharacterizations of distributions are mandatory. 20 In meeting this requirement, a fund should use reasonable efforts to make the most current determination of the tax character of each distribution. It is advisable for funds to retain written explanations of their efforts for this purpose. The tax character specification or any subsequent recharacterization need not be disseminated to shareholders prior to its use in an after-tax return calculation.

Advertisements

Question 17

Q. Under the after-tax return rules, funds are required to include standardized after-tax returns in advertisements and sales literature that include any quotation of performance and that represent or imply that the fund is managed to limit or control the effect of taxes on fund performance. 21 Advertisements and sales literature for a fund that is eligible to use a name suggesting that its distributions are exempt from federal income tax or both federal and state income tax under recently adopted rule 35d-1 are not, however, required to include standardized after-tax returns, unless they voluntarily choose to include after-tax performance information. 22 All fund advertisements and sales literature are required to comply with the new after-tax return rules no later than December 1, 2001, but compliance with rule 35d-1 is not required until July 31, 2002. Prior to July 31, 2002, must a fund that relies on the exception for tax-exempt funds from the requirement to report standardized after-tax returns in advertising and sales literature meet the requirements of rule 35d-1(a)(4)?

A. Generally, yes. Rule 35d-1 was effective on March 31, 2001. Although funds are not required to comply with rule 35d-1 until July 31, 2002, any fund that relies on the exception for tax-exempt funds from the after-tax return advertising rule at any time must comply with the eligibility requirements under rule 35d-1(a)(4) for using a name suggesting that the fund's distributions are exempt from federal income tax or from both federal and state income tax. As a practical matter, this means that, prior to July 31, 2002, in order to rely on the exception for tax-exempt funds from the after-tax return advertising rule, a tax-exempt fund, including a single state tax-exempt fund, need only comply with the eligibility requirements under rule 35d-1(a)(4) for using a name suggesting that the fund's distributions are exempt from federal income tax. The requirements set forth in rule 35d-1(a)(4) for a fund that has a name suggesting that its distributions are exempt from federal income tax are generally the same as those currently applied by the Division of Investment Management.

Compliance Date

Question 18

Q: If a fund files a post-effective amendment that is not an annual update to the fund's registration statement after the February 15, 2002 compliance date, must the fund's prospectus include the new after-tax return disclosure?

A: A fund is not required to include the new after-tax return disclosure in its prospectus until it files its first annual update on or after February 15, 2002. 23 If a fund files a post-effective amendment that is not an annual update on or after February 15, 2002, the fund need not include the after-tax return information in its prospectus unless it has previously filed an annual update on or after February 15, 2002.

Question 19

Q: If a fund's advertisements and sales materials used on or after December 1, 2001, (the compliance date for after-tax return advertisements and sales materials) include after-tax returns, does the fund also need to revise the risk/return summary of its prospectus at the same time to include the new after-tax return disclosure required by Item 2 of Form N-1A?

A: No. The fund will not be required to revise the risk/return summary of its prospectus to include standardized after-tax returns until the February 15, 2002 compliance date for prospectuses ( i.e., the fund's first annual update to its existing registration statement filed on or after February 15, 2002). 24

Performance of Predecessor Unregistered Accounts

Question 20

Q. The Division has stated that mutual funds may include in their prospectuses standardized before-tax total returns that include the performance of predecessor unregistered accounts under certain circumstances. MassMutual Institutional Funds (pub. avail. Sept. 28, 1995) (" MassMutual "). 25 We have been advised that, in many cases, such a fund is unable to compute standardized after-tax returns for the pre-registration period because of different tax treatment for those years ( e.g. , the absence of any requirement to distribute income to investors by December 31 of each year). How should such a fund comply with the after-tax return disclosure requirements in the risk/return summary of its prospectus?

A. If such a fund is unable to compute standardized after-tax returns for periods prior to registration because of different tax treatment for those years, the fund may include in the risk/return summary standardized after-tax returns for the post-registration period only, provided that the fund also includes standardized before-tax returns for the post-registration period. This will permit comparisons between after-tax returns and before-tax returns for the same periods. The fund also may continue to include in the risk/return summary of its prospectus before-tax returns from the date of inception of the predecessor unregistered account.

For example, assume that a fund has six years of performance as a registered entity and three years of performance as an unregistered entity and is unable to compute standardized after-tax returns for the three years prior to registration because of different tax treatment for those years. The fund may include in the risk/return summary standardized after-tax returns for one year, five years, and six years (the post-registration period), provided that the fund also includes standardized before-tax returns for those periods. In addition, the fund may include standardized before-tax returns for nine years (from the date of inception of the predecessor unregistered account) if its circumstances entitle it to rely on MassMutual .

Endnotes

The mid-term capital gain rate does not apply to a capital gain dividend reported to shareholders on IRS Form 1099-DIV for 1998 that is attributable to assets sold by a fund after July 28, 1997, and before January 1, 1998 (after being held for more than one year but not more than 18 months). See Omnibus Consolidated And Emergency Supplemental Appropriations Act, 1999, sec. 4002(i)(2), Pub. L. No. 105-277, 112 Stat. 2681-907 (1998).

I.R.C. 1(h)(2).

See I.R.C. 1222(7) (defining "net long-term capital gain"); I.R.C. 1222(8) (defining "net long-term capital loss").

See I.R.C. 1222(5) (defining "net short-term capital gain"); I.R.C. 1222(6) (defining "net short-term capital loss").

I.R.C. 1(a)-(d) (tax rates applicable to ordinary income); I.R.C. 1(h) (tax rates applicable to net capital gain); I.R.C. 1222(11) (defining "net capital gain" as excess of net long-term capital gain over net short-term capital loss).

I.R.C. 1(a)-(d) (tax rates applicable to ordinary income); I.R.C. 1211(b) (allowing losses from the sale of capital assets to the extent of gains from sales of capital assets). Because the after-tax return rules require a fund to assume that a shareholder has sufficient capital gains of the same character to offset any capital losses from the redemption, the benefit from any long-term capital loss resulting upon netting of capital gains and losses is determined at the long-term capital gain rate.

I.R.C. 1222(11) (defining "net capital gain"); I.R.C. 1(h) (tax rates applicable to net capital gain).

I.R.C. 1211(b) (allowing losses from the sale of capital assets to the extent of gains from sales of capital assets). Because the after-tax return rules require a fund to assume that a shareholder has sufficient capital gains of the same character to offset any capital losses from the redemption, the benefit from any short-term capital loss resulting upon netting of capital gains and losses is determined at the short-term capital gain (ordinary income) rate.

I.R.C. 1211(b) (allowing losses from the sale of capital assets to the extent of gains from sales of capital assets). Because the after-tax return rules require a fund to assume that a shareholder has sufficient capital gains of the same character to offset any capital losses from the redemption, the benefit from the net long-term capital loss is determined using the long-term capital gain rate and the benefit from the net short-term capital loss is determined using the short-term capital gain (ordinary income) rate.

Instruction 3 to Item 21(b)(2) of Form N-1A; Instruction 3 to Item 21(b)(3) of Form N-1A.

Instruction 7(b) to Item 21(b)(3) of Form N-1A.

Instruction 2 to Item 21(b)(2) of Form N-1A and Instruction 2 to Item 21(b)(3) of Form N-1A (requiring funds to assume that distributions, less taxes, are reinvested on reinvestment date).

Instruction 7(b) to Item 21(b)(3) of Form N-1A.

I.R.C. 852(b)(3)(D)(i).

I.R.C. 852(b)(3)(D)(ii) (shareholder deemed to have paid tax imposed on fund with respect to undistributed gains and is allowed credit or refund); I.R.C. 852(b)(3)(A) (imposing on fund tax on undistributed gains).

I.R.C. 852(b)(3)(D)(iii).

S. Rep. No. 1983, 85th Cong., 2d Sess., sec. 43 (1958); H.R. Rep. No. 432, Part II, 98th Cong., 2d Sess., p. 1192 (1984).

Instruction 3 to Item 21(b)(2) of Form N-1A; Instruction 3 to Item 21(b)(3) of Form N-1A.

I.R.C. 853(b)(2)(A).

See Disclosure of Mutual Fund After-Tax Returns, Investment Company Act Release No. 24832 (Jan. 18, 2001) [66 FR 9002, 9011 (Feb. 5, 2001)] (after-tax returns "will be calculated assuming that taxable amount and tax character of each distribution are as specified by the fund on the dividend declaration date, adjusted to reflect subsequent recharacterizations").

The compliance date for this requirement was recently extended from October 1, 2001, to December 1, 2001. See Disclosure of Mutual Fund After-Tax Returns; Extension of Compliance Date, Investment Company Act Release No. 25175 (Sept. 26, 2001) [66 FR 50102 (Oct. 2, 2001)].

Securities Act rule 482(f) [17 CFR 230.482(f)]; Investment Company Act rule 34b-1(b)(1)(iii)(C) [17 CFR 270.34b-1(iii)(C)].

Disclosure of Mutual Fund After-Tax Returns, supra note 20, 66 FR at 9011.

Id .

Under MassMutual , a fund may include in its standardized performance the performance of an unregistered predecessor investment account where, among other things, (1) the fund was managed in a manner that is in all material respects equivalent to the management of the unregistered predecessor account, and (2) the unregistered predecessor account was created for purposes entirely unrelated to the establishment of a performance record.

http://www.sec.gov/divisions/investment/guidance/mutualq-a.htm

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Modified: 01/14/2002