An unexpected tax bill has caused one small fund to take the unusual step of asking shareholders to vote twice on the same proposal in a four-month period.

The directors of the $13.6 million Flag Investors International Fund have asked shareholders to vote a second time to reorganize the fund because of an unexpected capital gain which could run as high as roughly 20 percent of the fund's net asset value, the fund said in a preliminary proxy statement filed with the SEC Jan. 21. The fund faces the sizeable tax bill because its net asset value increased by 21.73 percent in 1999, according to the proxy statement.

Directors had expected there would be no tax consequences to the reorganization when shareholders first voted on the proposal in October, according to a proxy filed Aug. 26 when it originally asked shareholders to approve the reorganization. Approximately 90 percent of the fund's shareholders voted to approve the reorganization at a meeting Oct. 7. On Jan. 17, however, fund directors voted to postpone the reorganization and ask shareholders to vote on it again after learning about the unexpected tax bill, the proxy statement said.

The tax bill is expected because the fund is changing money managers and investment strategies, according to SEC filings. As a result of the switch in managers and investment strategies, the fund could be forced to sell off all of its investments and incur capital gains, the fund said in the Jan. 21 proxy statement.

Executives at Investment Company Capital Corp. of Baltimore, Md., the adviser of the Flag Investors International Fund, did not return calls seeking comment last week. Shareholders are scheduled to vote on the proposal at a meeting Feb. 17, according to the proxy statement. International Company Capital Corp. is paying the costs associated with both the October and February votes, according to SEC filings.

As part of the reorganization, Flag Investors International is hiring Bankers Trust Co. of New York to run the fund, replacing the current sub-adviser, The Glenmede Trust Company of New York. Bankers Trust intends to run the fund using a growth investment strategy. Glenmede used a value strategy for managing the fund, the Jan. 21 proxy statement said.

It is rare but not unique for a fund to take a second proxy vote because of a quick change in the tax implications of an action, said Paul Kraft, an accountant in the Boston office of Deloitte & Touche of New York. It is not surprising that a switch in investment strategies can cause funds to incur a big tax bill from capital gains because of the appreciation in the markets at the end of last year, Kraft and other accountants said.

"It doesn't surprise me with the volatility of the market that we're seeing," said Anthony Evangelista, an accountant in the Boston office of PricewaterhouseCoopers of New York.

Flag Investors International ranked 165th out of 235 funds during the past five years, according to Lipper of Summit, N.J., the fund tracking firm. The fund's one-year return through Jan. 20 ranked it 560th out of 610 funds, according to Lipper.

International Company Capital Corp. is an affiliate of Bankers Trust, according to the proxy statement. The fund directors cited Bankers Trust's international equity investing experience in making the change in managers. The fund's fees and expenses are expected to remain the same after the reorganization, according to the proxy statement.

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