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1369Mutual Fund After-Tax Returns Must Be Adjusted

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  • Baker, John
    Feb 25, 2013
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      The staff of the Securities and Exchange Commission has announced that reported after-tax returns for mutual funds and exchange-traded funds must be adjusted to reflect the 3.8% tax on net investment income that became applicable to some taxpayers on January 1, 2013. This affects fund advertising as well as required disclosures in the fund prospectus. The announcement was made on the SEC's web page for Investment Management Staff Issues of Interest; unfortunately, the SEC does not announce when this page has been revised, so announcements there are easy to overlook. The full staff announcement reads:

      After-Tax Return
      Effective January 1, 2013, the Health Care and Education Reconciliation Act of 2010 (Pub. L. No. 111-152, 124 Stat. 1029 (2010)) imposed on certain taxpayers a 3.8% tax on net investment income ("3.8% tax").

      The staff recently was asked for its views on whether the 3.8% tax should be included in determining the highest individual marginal federal income tax rate used to calculate after-tax return required by Instructions 4 to both Item 26(b)(2) and (3) of Form N-1A. Since investors that are subject to the highest marginal rate on taxable income (currently 39.6%) are also subject to the 3.8% tax, we believe that registrants should include the 3.8% tax in after-tax return calculations (e.g., use 43.4% as the highest individual marginal federal income tax rate on ordinary income). Similarly, we believe that registrants should include the 3.8% tax in calculating the tax on qualified dividend income and long-term capital gains or any tax benefit resulting from capital losses required by Instruction 7 to Item 26(b)(3) (i.e., use 23.8% as the highest individual federal long-term capital gains tax rate, which is the sum of the 3.8% tax and the 20% maximum long-term capital gains tax rate). [February 22, 2013]

      The announcement is available online at


      John M. Baker
      Stradley Ronon Stevens & Young, LLP
      1250 Connecticut Avenue, NW, Suite 500
      Washington, DC 20036
      202.822.0140 fax
      FundLaw Listowner http://groups.yahoo.com/group/FundLaw/