Hope Fading for Tax-Free Trust Conversion Measure

Time is running out for bankers hoping this year would bring a tax-free way to convert common trust assets into mutual funds.

Trust conversion legislation seems likely to be a casualty of the continuing debate over the federal budget.

Supporters of the measure say the Clinton administration may have dealt it a death blow by ruling it an "objectionable special-interest tax provision" last December.

Treasury Secretary Robert Rubin reiterated the administration's opposition to the measure in a March 7 letter to Sen. Max Baucus, D-Mont., who had urged him to reconsider the special-interest label.

"We didn't pay a lot of attention to the original objection, figuring it was a lot of political posturing," said G. Andrew Bonnewell, vice president and corporate counsel at Federated Investors, Pittsburgh, and a proponent of the bill.

But that label, he added, may keep the tax-free conversion measure out of any budget bill crafted this year.

The failure of the tax-free conversion legislation would be a big disappointment for bank mutual fund programs. Bankers have long pursued a change in the tax code that would let them roll the last big pool of trust assets, estimated in 1994 at more than $131 billion, into mutual funds without triggering a tax hit.

Supporters' optimism rose last year when the provision was included in the budget passed by Congress. But President Clinton vetoed the bill.

Now conversion supporters such as Mr. Bonnewell hope the measure can be included in legislation that would increase the debt ceiling or consolidate various tax changes.

At least Mr. Rubin left that door open - provided that funds could be found to offset the $52 million of tax revenue that Congress' Joint Economic Committee estimated tax-free conversion would cost the government.

"Maybe there's a 10% chance," of attaching the provision to a tax or debt-ceiling bill, Mr. Bonnewell said. "But the discussion is just so unfocused, and time is running out."

But as Washington warms, hope springs eternal among tax conversion boosters, including James McLaughlin, director of agency relations, trust, and securities at the American Bankers Association.

"I cannot believe that if this were put in a bill that was otherwise acceptable to the White House, that they would veto it for this," he said.

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