For Tax-Free Trust Conversion, Bisys Says Try IRS

Despite repeated setbacks in their search for legislative relief, bankers may have a back-door route for tax-free conversion of common trust funds into mutual funds.

Bisys Group, a leading bank mutual fund and trust servicing company, is now advising banks to go to the Internal Revenue Service to solve their problems.

Bankers have long eyed shifting common trust assets, estimated in 1994 at $131 billion, into mutual funds as a way to simplify their management and simultaneously build proprietary fund programs.

But the prospect of paying taxes on converted common trust assets has discouraged most bankers from making the move.

By combining two rulings from the Office of the Comptroller of the Currency with a wrinkle in the tax code, banks can effectively move common trust assets into mutual funds tax free, Bisys executives said.

"If you're big enough to be in the mutual fund business, this is a transaction you ought to be looking at," said J. David Huber, president of Bisys Fund Services, a division of the Little Falls, N.J. company.

The method hinges on a bank first obtaining a letter from the Internal Revenue Service stating that an investment by a common trust fund in a corresponding mutual fund is to be treated as a contribution of assets rather than an outright purchase of shares.

That's far from a "cookie-cutter" interpretation and depends on the details of a bank's mutual fund and common trust funds, Mr. Huber said.

But meetings with the IRS have convinced Bisys executives that a solution can be found for almost any variation.

A tax expert at Coopers & Lybrand in Columbus, Ohio, said one bank that he declined to name had already obtained such a ruling. And Bisys executives said Mercantile Bank, St. Louis, filed its own request for such relief on Monday.

To win tax-free status for the transaction, the IRS requires the common fund to own 80% or more of the mutual fund. Yet banks can still fulfill OCC trust diversification requirements by treating the underlying securities in the mutual fund as the ultimate investments.

These requirements present little problem for brand new mutual funds. And for mature funds, clones of existing portfolios may do the job, Bisys executives said.

Even with the technical baggage, the idea is drawing a close look from bankers around the country.

"Everyone's grasping at straws to get something done," with trust conversion, said Mark A. Beeson, senior vice president and chief financial officer, Banc One Investment Advisers, Columbus, Ohio.

Banc One, which has $2.5 billion in 17 common trust funds, is evaluating the approach but is also considering consolidation of those trusts short of actually moving them into mutual funds.

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