RIC's RULE 12b-1 FEES ARE GENERALLY DEDUCTIBLE, IRS RULES.

Rev. Rul. 94-70

ISSUE

In computing the investment company taxable income of an open- end regulated investment company, what is the appropriate treatment of Rule 12b-1 fees?

ANALYSIS

In general, stock issuance expenditures are nondeductible capital expenditures that are charged to paid-in capital. See, e.g., McCrory Corp. v. United States, 651 F.2d 828, 833 (2d Cir. 1981). However, Rev. Rul. 73-463, 1973-2 C.B. 34, held that stock issuance expenses of an open-end regulated investment company (RIC), except those incurred during the initial stock offering period, are deductible as ordinary and necessary business expenses pursuant to section 162(a) of the Internal Revenue Code, to the extent those expenses are in fact paid or incurred by the company. Moreover, the legislative history of section 162(k)(2)(B), which exempts open-end RICs from the general rule denying the deductibility of stock redemption costs, cites Rev. Rul. 73-463 with approval. See S. Rep. No. 313, 99th Cong., 2d Sess. 224 & n.5 (1986), 1986-3 (Vol. 3) C.B. 224 & n.5.

Rule 12b-1 (17 C.F.R. section 270.12b-1 (1994)) (Rule 12b-1) was promulgated in 1980 and provides requirements and terms for a plan under which an open-end RIC may pay stock distribution costs. The fees paid by an open-end RIC pursuant to a Rule 12b-1 plan are virtually indistinguishable for this purpose from the costs cited in Rev. Rul. 73-463.

HOLDING

Rule 12b-1 fees paid by an open-end RIC, except those incurred during the initial stock offering period, are deductible as ordinary and necessary business expenses pursuant to section 162(a).

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 73-463 is amplified.

APPLICATION

Pursuant to section 7805(b), this revenue ruling will not be applied adversely with respect to Rule 12b-1 fees allocable to periods before April 1, 1995.

DRAFTING INFORMATION

For further information regarding this revenue ruling, contact Thomas M. Preston of the Office of Assistant Chief Counsel (Financial Institutions and Products) on (202) 622-3930 (not a toll-free call).