The window of opportunity for legislation on converting common trust funds to mutual funds is open, but we are not sure just how far.

The tax-free-conversion legislation, which previously appeared stalled, now seemingly has some life, although the fate of the congressional markup and further consideration this year of a miscellaneous tax bill appear increasingly at risk.

It is up to those of us who support the legislation to let Chairman Dan Rostenkowski of the House Ways and Means Committee, and other members of the committee, know how we feel.

Chairman's Commitment

The provision previously included in HR 13 (as well as 1992's HR 11), appears to have gained a life from the chairman's statement that he is still committed to a combined technical corrections/tax simplification bill, if he can locate revenue offsets in the $2 billion range (though some observers say $500 million is the maximum feasible offset).

Presumably, $1 billion is the approximate cost of the simplification provisions and technical corrections, most of which would come from those not enacted in HR 13 and HR 17. One of those provisions would allow for the tax-free conversion of a common trust fund to a mutual fund.

A subsequent change, suggested last summer by the Community Bankers Association of Illinois, would permit the tax-free transfer to one or more mutual funds. This version of the proposal would have numerous benefits.

Widespread Benefits

Large banks would benefit from the proposed legislation, as modified, by fully utilizing and building upon their existing funds.

Community banks would benefit by being able to convert smaller common trust funds with general investment objectives into more than one proprietary or nonproprietary mutual fund.

In addition, the legislation would provide benefits to common trust fund participants. Upon conversion, they would obtain daily valuations, published prices, liquidity, and reinvestment and distribution options.

Addressing Congress' need for revenue offsets, there should generally be no decrease in taxes paid by the investor in a mutual fund, as compared to a common trust fund.

In some instances, due to the modified flow-through nature of the mutual fund (compared with a strict flow-through for the common trust fund), there may actually be an increase in tax revenues, not to mention Securities and Exchange Commission filing fees.

While there is some opinion within the government that it stands to lose the revenues generated by taxable conversions of common trust funds, to date it is not clear how much tax revenue has actually been realized.

Many banks are still patiently awaiting congressional action for those trust funds on which more than de minimus gains exist.

Big Challenge

People interested in seeing the legislation move through the House Ways and Means Committee should contact their committee representatives immediately, though getting a complete tax bill to President Clinton this year appears to be a real challenge.

Getting a tax bill out of the House could have interesting political implications. Observers say the Senate could use the opportunity to try to repeal the retroactive application of increases in individual tax rates - a tactic that undoubtedly would stall the legislation.

The current opening may not last long. Priorities ranging from health care reform to international affairs are sure to begin to close this window of opportunity all too quickly.

Ms. Anderson is national tax director of KPMG Peat Marwick's mutual fund practice, based in New York.

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