The Internal Revenue Service has issued a notice and revenue procedure on requirements for investing in money market funds.

Notice 2016-32 provides guidance to taxpayers regarding the diversification requirements under Section 817(h) of the Tax Code for a segregated asset account that invests in a government money market fund, or MMF. The notice provides an alternative diversification criterion so that a segregated asset account that invests in a government MMF can meet the diversification requirement.

In 2014, the Securities and Exchange Commission the rules governing money market funds. Rule 2a–7 as amended identifies circumstances under which an MMF is permitted or required to impose a liquidity fee or is permitted to impose a redemption gate. When an MMF has a liquidity fee in effect, the liquidity fee reduces the proceeds received by all redeeming shareholders. A redemption gate is a temporary suspension of redemptions of shares in the MMF. Liquidity fees and redemption gates may be imposed by all MMFs in certain circumstances. Rule 2a–7 defines a government MMF as an MMF “that invests 99.5 percent or more of its total assets in cash, government securities, and/or repurchase agreements that are collateralized fully [by cash items or government securities].”

Revenue Procedure 2016-31 provides that certain contributions that money market funds receive from sponsors may be excluded from the distribution requirements of Section 852(a) of the Tax Code but are included in investment company taxable income for purposes of Section 852(b).

The revenue procedure provides temporary relief for certain money market funds that receive contributions from their advisers as the MMFs transition to comply with SEC rules that change how certain MMF shares are priced.

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