Rev. Rul. 72-13

Advice has been requested whether an open-end investment company as defined in the Investment Company Act of 1940, as amended (54 Stat. 789; 15 U.S.C. 80a-1 to 80b-2) can deduct certain stock issuance expenses, under the facts and circumstances described below, as ordinary and necessary business expenses.

There are two general types of open-end investment companies. The first type is one which imposes a sales charge on the shares sold. It sells its shares to an underwriter who in turn sells the open-end investment company's shares to a broker-dealer who in turn sells the shares to the ultimate public investor. The second type is one which sells its shares directly to the public investor without imposing a sales charge.

An open-end investment company is generally restricted to issuing stock that at all times is subject to the demand by the shareholder that it be redeemed by the issuer (i.e., the open-end investment company) upon tender.

There are certain expenses connected with the issuance and redemption of the stock of an open-end investment company. These include fees and costs directly incurred in the registration, issuance, and redemption of such stock. Specific examples of such stock issuance costs are: legal and accounting fees incurred in preparation of a registration statement, an S.E.C. filing fee, "Blue-Sky" filing and registration fees, distributing and printing prospectuses, printing stock certificates, printing and processing periodic investment and dividend reinvestment plans and applications for redemption, and processing stock certificates, maintaining stockholder share accounts, and costs of issuing checks for the proceeds of redeemed shares.

Stock issuance expenses may be paid by the open-end investment company, the underwriter of its shares, its registrar, transfer agent, custodian of the open-end investment company's assets, or its shareholders. For example, in the first type of open-end investment company described in the second paragraph of this Revenue Ruling the underwriter contractually agrees with the open-end investment company to pay out of its (the underwriter's) underwriting fee the cost of prospectuses, literature and advertising, registration and filing fees, and general operating expenses of the open-end investment company. In other cases a fee per transaction might be imposed on the shareholder for such services as processing periodic investments, dividend reinvestments, and partial withdrawals. These fees are commonly paid to a bank acting as the open-end investment company's dividend disbursing agent, transfer agent, and custodian. Frequently, a redemption fee (usually a percentage of the value of the share tendered) is imposed upon the shareholder by the open-end investment company when shares are redeemed.

Section 162(a) of the Internal Revenue Code of 1954 provides that there shall be allowed as a deduction all ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business.

The capital needs of the open-end investment company are subordinate to the wishes of its shareholders for a return of their capital without approval of directors or the majority of all shareholders. It is this constant possibility of withdrawal of part or all of capital by means of the redemption of stock, independent of all the usual business risks, that clearly distinguishes stock of open-end investment companies from the stock of other corporations. However, an open-end investment company is similar to an ordinary corporation in the sense that by its initial stock offering to the public it acquires the minimum capital necessary to engage in business. The initial stock offering period for an open-end investment company ends ninety days after the day its registration statement under the Securities Act of 1933 is first declared effective. In New York Stocks, Inc., Memo. Op. Dockets 107007, 108211 (February 12, 1943) it was concluded that stock registration expenses apparently incurred by an open-end management investment company to effect registration of a new issue of its capital stock with the Securities and Exchange Commission were not deductible as ordinary and necessary business expenses.

Accordingly, stock issuance expenses, except those incurred during the initial stock offering period, are deductible as ordinary and necessary business expenses under section 162(a) of the Code to the extent they are in fact paid or incurred by the open-end investment company.