rp-99-40.pdf

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# Part III

Administrative, Procedural, and Miscellaneous

26 CFR 601.201: Rulings and determination letters.
(Also Part I, §§ 561, 562, 852; 1.561-1, 1.562-2, 1.852-1,
1.852-3)

Rev. Proc. 99-40

## SECTION 1. PURPOSE

This revenue procedure describes conditions under which
distributions made to shareholders of a regulated investment
company (RIC) may vary and nevertheless be deductible as
dividends under $ 562 of the Internal Revenue Code.

SECTION 2. BACKGROUND

. 01 Section 852 (b) (2) (D) allows a RIC a deduction for
dividends paid (as defined in § 561 with certain modifications) .
Section 561 defines the deduction for dividends paid and applies
the rules of $ 562 to determine which dividends are eligible for
the deduction for dividends paid. Section 562 (c) provides that
the amount of any distribution is not considered a dividend for
purposes of computing the dividends paid deduction under § 561
unless the distribution is pro rata, does not prefer any share of

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stock of a class over any other share of stock of that same
class, and does not prefer one class of stock over another class
except to the extent that one class is entitled (without
reference to waivers of their rights by shareholders) to the
preference.

. 02 Many RICs have issued groups of shares that represent
interests in the same portfolio of securities but have different
arrangements for shareholder services or the distribution of
shares or both. Because the fees for these arrangements and
services may vary, shareholders with equivalent investments in
the same fund may receive different distributions. To permit
open-end management investment companies to issue these groups of
shares, the Securities and Exchange Commission (SEC) has adopted
Rule 18f-3, 17 C.F.R. 270.18f-3, under the Investment Company Act
of 1940, 15 U.S.C. 80a-1 to -64 (1940 Act) .

. 03 Rev. Proc. 96-47, 1996-2 C.B. 338, describes conditions
under which distributions made to shareholders of a RIC may vary
and nevertheless be deductible as dividends under § 562. Rev.
Proc. 96-47 does not address the treatment of distributions to
shareholders that differ in part as a result of the allocation of
the benefit of a waiver or reimbursement of a fee or expense.
Furthermore, Rev. Proc. 96-47 does not address variations in
distributions that arise as a result of the allocation of
performance-based advisory fees.

SECTION 3. SCOPE

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This revenue procedure applies to a RIC described in
$ 851 (a) and § 851 (b) (1) that issues groups of shares (Qualified
Groups) that meet the requirements of this section. The
requirements in this section are to be interpreted in a manner
consistent with the SEC's interpretation of analogous
requirements in the rules under the 1940 Act. See Rule 18f-3 (a) ,
17 CFR 270.18f-3 (a), and Exemptions for Open End Management
Investment Companies Issuing Multiple Classes of Shares,
Investment Company Act Release No. 20,915, 60 Fed. Reg. 11,876 at
11,878 (Mar. 2, 1995) .

. 01 Each Qualified Group shall have a different arrangement
for shareholder services or the distribution of shares or both,
and shall be allocated and shall pay the fees and expenses of
that arrangement.

. 02 Each Qualified Group may be allocated and may pay a
different share of other fees and expenses, not including
advisory or custodial fees or other fees and expenses related to
the management of the RIC's assets, if these expenses are
actually incurred in a different amount by that Qualified Group,
or if the Qualified Group receives services of a different kind
or to a different degree than other Qualified Groups.

. 03 Each Qualified Group --

(1) Shall be allocated and shall pay an advisory fee and
other fees and expenses related to the management of the RIC's
assets (including custodial fees and tax return preparation fees)
on the basis of the net asset value of the Qualified Group in

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relation to the net asset value of the RIC, except as described
in paragraph (2); and

(2) May be allocated and may pay a different advisory fee to
the extent that any difference in amount paid is the result of
the application of the same performance fee provisions in the
advisory contract to the different investment performance of each
Qualified Group.

. 04 The rights and obligations of the shareholders of each
Qualified Group are set forth in the RIC's organizing documents.
Except as otherwise provided in this revenue procedure, each
Qualified Group is entitled to distributions calculated under
those documents in the same manner and at the same time as all
other Qualified Groups. For purposes of this calculation, fees
and expenses are allocated under those documents to each
Qualified Group at the same time as to all other Qualified
Groups. Organizing documents are documents of the RIC that fix
the rights and obligations between the RIC and the shareholders
and that are approved by a majority of the directors of the RIC.

. 05 Each Qualified Group separately meets the requirements of
§ 67 (c) (2) (B) (defining the required characteristics of shares of
a publicly offered RIC) .

SECTION 4. WAIVERS AND REIMBURSEMENTS

Any waiver or reimbursement of a fee or expense incurred by
the RIC shall meet the following requirements:

. 01 Fees and expenses related to arrangements for
shareholder services or the distribution of shares. The benefit

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of a waiver or reimbursement of all or part of a fee or expense
that is described in section 3.01 of this revenue procedure is
allocated to the Qualified Group of shares on behalf of which the
fee or expense was incurred. Thus, for example, if a RIC meeting
the requirements of this revenue procedure issues Class A shares
bearing a Rule 12b-1 fee of .50 percent of net asset value and
issues Class B shares bearing a Rule 12b-1 fee of .75 percent of
net asset value, a distributor may waive all or part of the
Class B Rule 12b-1 fee. Because the Class B Rule 12b-1 fee was
allocated to Class B on the basis of the amount incurred by
Class B, the benefit of a waiver of the Class B Rule 12b-1 fee is
allocated entirely to Class B, and no portion of the waiver may
be allocated to Class A.

. 02 Other fees and expenses. The benefit of a waiver or
reimbursement of all or part of a fee or expense described in
section 3.02 of this revenue procedure is allocated in accordance
with the method of allocation of the fee or expense pursuant to
section 3.02. If pursuant to section 3.02 the fee or expense was
allocated on the basis of the amount incurred on behalf of each
Qualified Group, the benefit of a waiver or reimbursement of the
fee or expense described in section 3.02 is allocated to the
Qualified Group of shares on behalf of which the expense was
incurred. If pursuant to section 3.02 the fee or expense was
allocated on the basis of net asset value, the benefit of a
waiver or reimbursement of the fee or expense is allocated by net
asset value. Thus, for example, if Class A shares are allocated

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a transfer agency fee pursuant to section 3.02 on the basis of
the amount incurred by Class A, and Class B shares are allocated
a transfer agency fee pursuant to section 3.02 on the basis of
the amount incurred by Class B, the transfer agent may waive all
or part of the Class B transfer agency fee. Because the Class B
transfer agency fee was allocated to Class B on the basis of the
amount incurred by Class B, the benefit of a waiver of the
Class B transfer agency fee is allocated entirely to Class B, and
no portion of the waiver may be allocated to Class A.

. 03 Advisory fees and other expenses related to the
management of the corporation's assets -- (1) General rule. The
benefit of a waiver or reimbursement of a fee or expense that is
described in section 3.03 (1) of this revenue procedure is
allocated to all shares by net asset value, regardless of
Qualified Group, except as provided in paragraph (2) of this
section.

(2) Performance fees. A RIC whose advisory contract
contains performance fee provisions described in section 3.03 (2)
of this revenue procedure shall comply with the requirement in
this section 4.03(2) instead of that contained in section 4.03 (1)
of this revenue procedure. If, under these performance fee
provisions, a Qualified Group is allocated an advisory fee that
exceeds the advisory fee that would have been allocated to that
Qualified Group if its performance were equivalent to that of the
index or other measure of performance under these performance fee
provisions, then the benefit of a waiver or reimbursement of all

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or part of the excess shall be allocated to the Qualified Group
to which the excess is allocated. The benefit of any waiver or
reimbursement of any other portion of the advisory fee shall
comply with section 4.03(1) of this revenue procedure.

SECTION 5. PROCEDURE

If variations in distributions to shareholders of different
Qualified Groups exist solely as a result of the allocation and
payment of fees and expenses and the allocation of the benefit of
waivers and reimbursements of fees and expenses in accordance
with the applicable provisions of section 3 and 4 of this revenue
procedure, these variations do not prevent the distributions from
being dividends under $ 562.

SECTION 6. EFFECT ON OTHER REVENUE PROCEDURES

Rev. Proc. 96-47, 1996-2 C.B. 338, is amplified and
superseded.

# SECTION 7. EFFECTIVE DATE

This revenue procedure is effective October 28, 1999.

## DRAFTING INFORMATION

The principal author of this revenue procedure is Susan
Thompson Baker of the Office of Assistant Chief Counsel
(Financial Institutions and Products) . For further information
regarding this revenue procedure, contact Susan Baker at (202)
622-3940 (not a toll-free call) .