Fund industry's ETN challenge may backfire (Investment News)

Leading House Republican questions attacks on deferred tax status of exchange traded notes

By Sara Hansard
Investment News

WASHINGTON (March 17, 2008) - The mutual fund industry's push for raising taxes on exchange-traded notes may come back to hurt the industry when it asks Congress to defer taxes on mutual funds, the ranking minority member of a House Ways and Means subcommittee said.

The Investment Company Institute should "articulate a tax policy beyond simply arguing for a level playing field," Pennsylvania Rep. Phil English told InvestmentNews.

Mr. English is the ranking Republican member of the Ways and Means select revenue measures subcommittee, which held a hearing March 5 on legislation introduced by subcommittee chairman Richard Neal, D-Mass., which would end tax deferrals for ETNs and other prepaid forward contracts and tax them at ordinary income tax rates. Currently, many ETNs are taxed at lower capital gains rates.

At the same time, however, Mr. English said he sympathizes with the Washington-based ICI. "I think ICI is genuinely conflicted on this, and has been forced into a position of having to weigh some truly unsatisfactory alternatives."

"The obvious answer is to basically create a deferral for people who are involved with mutual funds," Mr. English said. Legislation known as the Generate Retirement Ownership Through Long-Term Holding (Growth) Act of 2007, which was introduced by Rep. Paul Ryan, R-Wis., would allow investors in taxable mutual funds to defer capital gains taxes until their shares are sold.

However, Mr. English said, "I don't believe the current majority in Congress has the ideological flexibility to consider doing that." The legislation introduced by Mr. Neal is being driven by "the majority's hunger for revenue," he said. "What they're doing is [looking for ways to raise money] rather than coming up with the best strategy for dealing with these sorts of investments."

Indeed, a Democratic tax counsel on the Ways and Means Committee, who declined to speak for direct attribution, agreed that the Growth Act is not a bill "that the Democratic members have been very interested in the past."

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