For RICs, it is important that the acquired fund is satisfied that the acquiring fund is, in fact, qualified as a RIC; as well as the reverse.

Different accounting methods used by the funds must be addressed. This is particularly important for tax purposes, e.g., tax amortization of discount and premium in fixed income funds. Notwithstanding which is the acquired and which is the acquiring fund in the transaction, for tax purposes, a change is made to the dominant method of accounting. With regard to discount and premium amortization, the method used to account for the greater amount of such item and related accounts is deemed to be the dominant method and should be the surviving accounting method. There would be a "catch-up" adjustment to adjust the accounts to where they would have been had the "new" policy been in effect since inception.

Under a tax-free reorganization, both basis and holding period of securities carry over to the acquiring fund for both book and tax purposes. Accordingly, the acquiring fund should satisfy itself as to the integrity of the records supporting the acquired fund's assets.

The utilization of loss carryforwards and built-in losses may be limited in current and future years where a fund incurs a change in ownership. If either fund has a built-in gain at the date of the reorganization, additional limitations may apply. The assistance of an engagement team tax specialist should be sought in reviewing financial statement disclosures in such a case.

In a "C" reorganization, the acquired fund's tax year ends at the end of the month of the merger. The fund must remain qualified as a RIC until the merger date and distribute its taxable income and gains immediately prior to the merger. Additionally, returns must be filed within 3-1/2 months of the month-end of the merger (2½ months if merger date is in June) or extensions must be filed. Note that in many instances this will result in a short final year.

For a reorganization to be tax free, among other requirements, the fund must meet the "continuity of interest" and "continuity of business interest" requirements. As counsel generally is required to render an opinion on the tax treatment of the merger, counsel's interpretation with respect to various requirements generally prevails and we rely on that opinion. If no opinion of counsel is received, the engagement team for the surviving entity should consider the absence of an opinion when planning the scope of the audit.