Collective Investment Funds

Federal Tax Laws

A significant advantage offered by a CIF is that the capital gains and income received by the CIF are ordinarily not subject to federal taxes. CIFs achieve tax-exempt status by operating in conformance with either IRC section 584 or Revenue Ruling 81-100. Although tax-exempt, a CIF is considered a separate tax entity.

Section 584 of the IRC provides tax exempt status to a CIF that is operated by a bank “exclusively for the collective investment and reinvestment of monies contributed to the bank in its capacity as a trustee, executor, administrator, guardian, or custodian [of an account opened under a state law that is substantially similar to the Uniform Gifts to Minors Act].” Under section 584, the income, capital gains, and losses of the CIF are shared by the CIF participants in proportion to their investment in the CIF. In order to retain its tax-exempt status under section 584, a CIF must operate in compliance with 12 CFR 9.18 as well as the federal tax laws. A1 funds by definition qualify for section 584 status. An A2 fund that strictly limits admission to tax-exempt participants with whom the bank has one of the enumerated trusteed relationships would also qualify for section 584 status.

A2 funds are more commonly granted a tax exemption by Revenue Ruling 81-100 and IRC section 401(a). Because these funds are not limited to the enumerated capacities provided for A1 funds, they may therefore include agency accounts. However, any account that participates in an A2 fund pursuant to Revenue Ruling 81-100 must also incorporate by reference the terms of the CIF’s Plan in its governing instrument. ^[1]

Banks that collectively invest the assets of tax-exempt EB accounts in A2 funds will want to ensure that those funds qualify for the tax exemption granted these CIFs under Revenue Ruling 81-100. In order to qualify for the tax exemption described in the revenue ruling, each EB account participating in the CIF must either qualify as a tax exempt entity under section 401(a) of the IRC or be an entity described in section 818(a)(6) of the IRC, and must also comply with a number of technical requirements.

Banks operating CIFs are required to file annual informational returns with the IRS for each fund established under IRC section 584. While there is no specific form for this filing, IRS Form 1065 with Schedule K-1 (Partner’s Share of Income, Credits, Deductions) is typically used to satisfy the reporting requirement. The IRS requires information about each fund participant, including name, address, and proportional share of taxable income or losses, and capital gains or losses. This informational return is required, regardless of the taxable income earned during the reporting period.

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