SECTION 3. BACKGROUND

.01 Mutual funds generally distribute new shares to the public through a distributor. If an investor purchases mutual fund shares through a broker, either the investor or the distributor pays the brokerage commissions. If the distributor pays the brokerage commissions (i.e., distributor commissions), the distributor typically recovers this cost by collecting from the mutual fund a distribution fee in accordance with Rule 12b–1 and, in some cases, by receiving a sales charge from the investor if the shares are redeemed within a specified period of time.

.02 Under § 446, the Commissioner has broad authority to determine whether a method of accounting clearly reflects income. Under § 446(b), if a taxpayer’s method of accounting does not clearly reflect income, the computation of taxable income must be made under a method

October 2, 2000 310 2000–40 I.R.B.

that, in the opinion of the Secretary, does clearly reflect income. See Thor Power Tool Co. v. Commissioner, 439 U.S. 522 (1979), 1979–1 C.B. 167; Commissioner v. Hansen, 360 U.S. 446 (1959), 1959–2 C.B. 460; § 1.446–1(c)(2)(ii) of the Income Tax Regulations.

.03 To minimize disputes regarding the accounting for distributor commissions and to provide appropriate methods for matching those commissions with the related distribution fees and sales charges so as to clearly reflect income, the Internal Revenue Service will permit a taxpayer that complies with the requirements of this revenue procedure to account for distributor commissions using any of the three permissible methods of accounting described in § 5 of this revenue procedure. A taxpayer may use any of these three methods to account for the distributor commissions related to each class of shares within each mutual fund for which it acts as a distributor.

.04 A change in a taxpayer’s treatment of distributor commissions to any of the three permissible methods described in § 5 of this revenue procedure is a change in method of accounting to which §§ 446 and 481 apply. Sections 446(e) and 1.446–1(e) provide that, except as otherwise provided, a taxpayer must secure the consent of the Commissioner before changing a method of accounting for federal income tax purposes. Section 1.446–1(e)(3)(ii) authorizes the Commissioner to prescribe administrative procedures setting forth the limitations, terms, and conditions deemed necessary to permit a taxpayer to obtain consent to change a method of accounting.