Bankers' hopes for tax-free conversion of common trusts into mutual funds have risen from the legislative ashes.

Late last Wednesday, the Senate Finance Committee approved a bill to raise the minimum wage - and tucked into it a measure to grant tax relief for common trust fund conversions.

Although the measure still faces several hurdles, bank mutual fund executives cheered the panel's decision.

Banks' mutual fund business could get a big boost if Congress clears the path for banks to restructure the $131 billion now in common trust funds, they said. Under current law, reorganizing these trusts as mutual funds could trigger liability for any accrued capital gains.

"The outcome was a very delightful surprise," said G. Andrew Bonnewell, vice president and corporate counsel at Federated Investors, Pittsburgh. "Sometimes you have more momentum than you think."

President Clinton's December veto of the 1995 budget bill, which included the measure, was the most recent of many blows to supporters.

"Finally the stars and the moon may have aligned properly," said Robert M. Kurucza, law partner at Morrison & Foerster, Washington. He urged bankers to redouble their efforts to secure political support. "It's time for the banking industry to get mobilized on this."

To become law, the bill would have to pass the full Senate, be reconciled with a House minimum-wage bill that does not contain the measure, and then be signed by President Clinton.

That string of conditions and a history of failed attempts have fueled doubts among some industry veterans.

"We've gotten fairly close with provisions like this only to have them vetoed, said Martin L. Klopping, president of Wilmington Trust's proprietary mutual fund unit. "I'll believe it when I finally see it."

David Huber, president of Bisys Fund Services, Columbus, Ohio, said banks shouldn't wait for Congress to ease the tax rules before converting common funds. Indeed, he maintained, "the conversion trend is going to accelerate regardless of the legislation."

That's because the Internal Revenue Service and the Office of the Comptroller of the Currency have clarified that a common trust fund can invest all its assets in a mutual fund without paying tax, making indirect conversions possible.

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