Capital-Gains Stall

Those lucky investors who years ago put $20,000 into International Business Machines, or a similar growth stock, and have seen it soar to $500,000 today, do have some problems. How can they get their eggs out of the one big basket, spreading the risk by putting their money into a number of stocks, without paying the 25% federal capital-gains tax? To help investors out of this gilt-edged dilemma, two young Denver bankers, Ranald H. Macdonald, 36, and William M. B. Berger, 35, launched a new mutual fund that permits diversification without selling and paying taxes.

Macdonald and Berger found that Section 351 of the tax law says, in effect, that a person contributing assets or stock to form a new corporation can receive in return shares in the corporation equal in value to his original stock without paying a capital gain. Their first venture was Centennial Fund, Inc. In four months 191 investors turned in an average of $125,000 in securities to create a $25.8 million fund. In exchange for their shares, the investors got shares of Centennial, receive Centennial's earnings as dividends.

If the fund sells any of its holdings, it pays a gains tax based on the original price of the stock, and pro-rates it among the fund shareholders. When a Centennial stockholder sells his fund shares, he also pays a gains tax. It is figured on the difference between the original cost of his original shares and the selling price of the fund shares. So that he will not be taxed twice, he is allowed to deduct whatever pro-rated tax he has paid while he held the fund shares. Macdonald and Berger get their income by charging a commission of up to 4% on the assets that new members contribute to the fund, plus an annual fee of one-half of 1% of net asset value for management.

"No one gets out of paying a capital-gains tax," explains Berger. "They just put it off while they broaden their investments." The idea has caught fire. By last week there were at least six copies of Centennial operating or in the process of being formed by such firms as Keystone Co. of Boston and Hugh W. Long & Co. of New Jersey, while Macdonald and Berger were looking for more wealthy investors to start Centennial Fund II. They require $25,000 as a minimum investment, but two of the funds (Devonshire Street-Fund, Inc. and Congress Street Fund, Inc.) are reaching lower on the scale for investors with only $15,000.

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