Legislation introduced in the U.S. House in June that would lower the capital gains taxes investors involuntarily incur as a result of the distributions made within fund portfolios, has received varying reviews from representatives and executives of the mutual fund and annuity industries. The advantages the measure would give the mutual fund industry could drive a wedge between it and the annuities industry.

The bill would offer investors exemptions on taxes of up to $3,000 in reinvested capital gains distributions each year. Any gains would still be subject to capital gains taxes when the funds' shares are redeemed.

Rep. Jim Saxton (R - N.J.) introduced the bill to bring the tax treatment of mutual funds more in line with that of stocks.

"The current tax treatment of mutual fund shareholders undermines incentives for personal saving and investment, and should be ended," he said, in a statement. "Current tax law mandates that mutual funds distribute fund capital gains to shareholders. Thus, shareholders who have not realized capital gains themselves must pay federal taxes anyway, often amounting to several thousand dollars."

The bill addresses an important issue that the ICI is concerned with, said John Collins, a spokesperson for the ICI.

"The ICI has started looking at the bill and what effect it would have on shareholders," he said. "We traditionally support any measure that would provide middle income investors with tax relief but we were not involved in the drafting of the bill. But we share [Saxton's] concerns on the tax burden on investors and we recognize that this is to benefit the shareholder."

The bill would also benefit the fund industry in that it would provide investors with a greater incentive to follow a buy and hold investment strategy, Collins said. Several major fund companies have also expressed support for the bill, said Jeff Sagnip, a spokesperson for Saxton. He declined to disclose the firms' names.

Since one of the major benefits of an annuity is its tax deferral, at least one industry analyst - John Rekenthaler, author of the Rekenthaler Report - has speculated that the passage of the bill could reduce the attractiveness of annuities held outside of qualified plans. However, Peter Cummins, senior vice president at Hartford Life Insurance Company of Simsbury, Conn., disagrees.

Annuities are not sold for tax purposes and have a number of other benefits that make them attractive investments, said Cummins.

"One-third of our business is in tax qualified plans to begin with," Cummins said. "Clients are interested in the other guarantees and benefits that an annuity offers, such as the ability to annuitize, the fact that it is a fixed account, and the ability to engage in dollar- cost-averaging. For non-qualified investors, an annuity does have a tax advantage, and in qualified plans, investors have the ability to liquidate their assets on a quarterly basis during their lifetime."

Cummins said the bill's cap of $3,000 is very low and investors would derive very little benefit from the exemption. It is also unlikely that a tax bill of any sort will be passed by the present Congress, he said.

The National Association for Variable Annuities of Reston, Va. has not yet taken a position on the bill, according to Tom Conner, vice president and general counsel at NAVA.

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