Bankers across the country are working to clear a number of logistical hurdles before they can complete tax-free conversions of common trust fund assets into mutual funds.

But the challenge for Massachusetts bankers is even greater.

Though Congress earlier this year altered the federal tax code to allow for tax-free conversion of trust assets, that resolution is not effective under Massachusetts' state law.

As a result, trust clients in the Bay State - home to almost a fifth of the nation's common trust fund assets - will be subject to a state personal tax when their shares of common trust funds are exchanged for those of mutual funds.

That problem has prompted the Massachusetts Bankers Association to lobby state lawmakers to do away with the state tax on trust conversions.

"Massachusetts is a notorious case of a state that has a tax code that isn't in line with federal tax code," said John M. Loder, a partner at Ropes & Gray, a Boston law firm.

As a center of both bank and nonbank money management activity, Massachusetts holds a particularly large share of the nation's common trust fund assets. The state is home to $138 billion in common trust fund assets, 17% of all such assets in the United States, according to a report by the Federal Financial Institutions Council.

Last Wednesday, 50 trust bankers in Massachusetts attended a meeting in Boston co-sponsored by the Massachusetts Bankers Association and First Data Investor Services Group to learn more about the issue.

In attendance were bankers from NationsBank Corp., Mellon Bank Corp., State Street Boston Corp., Bank of Boston Corp., and Investors Bank and Trust Co. Speakers at the meeting issued lists of considerations for bankers to check off as they go through the common trust conversion process.

But foremost on everyone's mind was clearing up the tax issue in Massachusetts.

David E. Floreen, senior vice president of government affairs/trust services for the Massachusetts Bankers Association, said he hopes the state Legislature will entertain a simple, one-issue amendment filed by his association before Dec. 4 to solve the problem.

Waiting for the state to eventually update the personal income tax code by its own volition is not an option for the banks.

"It would make it pretty difficult for most of the institutions to convert any of their funds," Mr. Floreen said.

Barbara L. Worthen, an executive vice president of First Data Investor Services Group, a fund servicing company, added that the expenses associated with conversions should not hold bankers back.

"There may be a cost (for banks) to not being in the business of offering sophisticated investment vehicles," she said.

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