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Senators urge Treasury to fix money fund tax concerns

By Sarah N. Lynch

WASHINGTON (Reuters) - A bipartisan group of U.S. senators is pressuring the Treasury Department to relieve money market fund investors from tax rules that will kick in if the Securities and Exchange Commission decides to force some funds to float their share price.

In a series of three letters dated July 15 and seen by Reuters, Democratic Senators Bob Menendez of New Jersey and Mark Warner of Virginia and Republicans Pat Toomey of Pennsylvania and Mike Crapo of Idaho said the Treasury needs to issue quickly guidance because it will help inform both the public and the SEC.

All four senators sit on congressional committees with jurisdiction over the SEC and the Internal Revenue Service.

"Money market mutual fund investors must be given an opportunity to review and comment on the proposed solution to the tax compliance burden, and the SEC and Department of Treasury should have the benefit of those comments," Toomey wrote in his letter.

The pressure from the four senators come at a crucial time for the SEC, which is close to finishing new reforms for money market funds that aim to reduce the risk of investor runs like the one on the Reserve Primary Fund during the 2008 financial crisis.

The SEC is leaning toward adopting a combination of two key reforms, according to a person familiar with the matter. One would force prime funds used by institutional investors to switch from a stable $1-per-share net asset value (NAV)to a floating net asset value.

The other would allow fund boards to shut "gates" on redemptions and charge liquidity, or withdrawal, fees in times of market stress.

Although in principle most SEC commissioners are likely to support a floating NAV, the still-unresolved tax concerns could be a wrinkle for SEC Chair Mary Jo White as she tries to build a consensus with the other four commissioners.

The primary tax concern for money funds has to do with rules that would be triggered requiring investors to track gains and losses.

Today, all money funds have a stable $1 per share NAV. That makes things simple for tax purposes because a stable price does not generate gains or losses. But if the share price floats, investors will need to track tiny gains and losses.

In addition, floating shares of money funds could also separately trigger "wash sale" tax rules, which bar an investor from recognizing losses from the sale of securities if the investor purchased substantially identical shares within 30 days before or after such sale.

The IRS last year proposed new guidance that would exempt investors from wash sale rules if they meet certain criteria, but has not issued guidance on how to treat gains and losses.

The SEC has said the IRS is working on a fix on the tax reporting concern that would simplify tax returns.

But several of the senators said that simplifying tax reporting and creating a safe harbor from the wash sale rules does not go far enough.

"Investors could still be deterred from investing in or using money market mutual funds for cash management if they must calculate and track the small capital gains and losses resulting from frequent transactions in a fund," wrote Menendez and Warner.

SEC Republican Commissioner Mike Piwowar on Tuesday told reporters he is aware of a tax fix that is being developed, but declined to say what it is or whether it will go far enough.

A Treasury spokeswoman said the department received the letters and would respond.

(Reporting by Sarah N. Lynch; Editing by Jonathan Oatis)

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