IRS rule banning start-up deductions may lead fund companies to hike fees.

A new tax policy could prompt mutual fund management companies to hike the administrative fees they charge investors, an industry accountant is warning.

The policy, outlined in an Internal Revenue Service statement in the spring, effectively bars mutual fund companies from taking a federal tax deduction for some of the costs of starting a fund. Such deductions are now the norm, said Joseph M. Diangelo, a tax manager in the Columbus, Ohio, office of Coopers & Lybrand.

The fund start-up costs, which typically include market research and legal expenses, can exceed $50,000 per new portfolio. Costs are highest for funds that invest overseas.

Mr. Diangelo, a specialist in bank proprietary funds, believes fund managers won't swallow higher tax bills. Instead, they are likely to tack the expenses onto 12(b)-1 fees already charged to investors for administrative work.

The extra costs would be minuscule for the average investor, but when added up for the whole industry, they could be sizable.

Fund companies have been deducting these expenses from taxes just as they deduct other expenses that aren't capital investments. But the IRS said that fund companies should treat these fund startup costs as capital outlays that must be amortized and deducted over the capital's expected life.

But the so-called life of a fund start-up cost is nearly impossible to figure, Mr. Diangelo said, because it expires only when a fund changes hands, a rare event in the industry.

As a result, fund managers can't come up with a standard way to amortize the expenses for tax deductions.

Mr. Diangelo said that fund managers oppose the tax policy change, and, to date, aren't abiding by the new rule, in the hope that it will be changed or that some other way will be found to deduct the expenses. But Mr. Diangelo said the IRS was unlikely to change the rule.

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