AMERICAN CENTURY INVESTMENTS
4500 MAIN STREET
KANSAS CITY, MISSOURI 64111
November 7, 2006
Mr. Jeff Long
Securities and Exchange Commission
Division of Investment Management
100 F Street, Northeast
Washington, DC 20549
RE: American Century Mutual Funds, Inc.
American Century New Opportunities II Fund
1933 Act File No. 2-14213
1940 Act File No. 811-00816
This letter responds to your specific instruction that we furnish a written
summary of the response provided to your oral request for clarification on the
tax treatment of the proposed reorganization of the Kopp Emerging Growth Fund, a
portfolio of Kopp Funds Inc., into the American Century New Opportunities II
Fund, a portfolio of American Century Mutual Funds Inc. (the "Transaction").
During a call with you on October 11, 2006, our counsel, Reed Smith LLP,
reviewed the tax analysis pertaining to the Transaction. During the call, the
following precedent was reviewed with you:
(A) Treasury Regulation Section 1.368-1(d).
(B) IRS Revenue Ruling 87-76, 1987-2 C.B. 84.
(C) Private Letter Rulings 200540001, 200542005, 200542006, 200543049, and
200546007 (the "July 2005 Rulings").
(D) Private Letter Ruling 200621011, 200621012, and 200622021 (the "2006
Rulings").
Under Treasury Regulation 1.368-1(d), one of the requirements for an
acquisitive reorganization, such as the Transaction, to be treated as tax-free
is the continuity of business enterprise ("COBE") test. Under COBE, an
acquisition will qualify if the acquirer acquires either a significant portion
of the historic assets of the target or a significant line of business of the
target. The Transaction is designed to satisfy the significant line of business
portion of the COBE test.
In Revenue Ruling 87-76, the Internal Revenue Service (the "Service") ruled
that an acquisition in which an equity fund was acquired by a municipal bond
fund after the equity fund disposed of all of its assets did not satisfy the
COBE test because (i) the acquiring fund did not acquire a significant portion
of the target fund's historic assets and (ii) the business of the acquiring fund
after the acquisition (investment in municipal bonds) was not the same business
as the business of the target fund (investment in equity securities).
Importantly, the Service did not hold that the significant line of business
portion of the COBE test was unavailable to investment companies, such as mutual
funds, but merely that the businesses of the two funds were not the same.
The Service issued relatively little additional guidance concerning the
application of the COBE test to acquisitions by mutual funds until 2005. As a
result of lack of guidance,
Mr. Jeff Long, Securities and Exchange Commission
November 7, 2006
Page 2
some law firms required that the acquiring fund retain a significant portion of
the historic assets of the target fund in order to support a favorable tax-free
reorganization opinion. In the 2005 Rulings and the 2006 Rulings, the Service
specifically ruled that acquisition of mutual funds could satisfy the COBE test
by reference to the significant line of business portion of that COBE test. In
reaching this conclusion, the Service relied on representations from the
Acquiring and the Target funds concerning the lines of business in which the two
funds were engaged. For example, in Private Letter Ruling 200622021, the parties
represented that:
(1) On the date of Reorganization, at least 33 1/3% of Target's portfolio
assets would meet the investment objectives, strategies, policies, risks and
restrictions of Acquiring Fund.
(2) Target Fund did not alter its portfolio in connection with the
Reorganization to meet the 33 1/3% threshold.
(3) On the date of Reorganization, Acquiring Fund would have no plan or
intention to change any of its investment objectives, strategies, policies,
risks and restrictions after the Reorganization.
As described in the combined Proxy Statement/Prospectus relating to the
Transaction, the investment objectives of Kopp Emerging Growth Fund and the
American Century New Opportunities II Fund are substantially similar.
Furthermore, both funds are engaged in the business of investing primarily in
the common stock of domestic corporations with small to medium market
capitalizations. Given the similarity of securities in which the two funds
invest and the results of a review of portfolio holdings performed as a part of
the due diligence relating to the Transaction, a sufficient amount of the assets
of Kopp Emerging Growth Fund could be held by the American Century New
Opportunities II Fund. Accordingly, Reed Smith believes that it can conclude
that in the Transaction the Kopp Emerging Growth Fund and the American Century
New Opportunities II Fund are engaged in the same line of business, thereby
satisfying the significant line of business portion of the COBE test.
Note that while the 2005 Rulings and the 2006 Rulings are Private Letter
Rulings upon which taxpayers, other than the taxpayer obtaining the particular
ruling, may not rely, they are indicative of the Service's position on the
subject matter of the ruling. Because of the number of recent rulings and the
fact that the 2005 Rulings and 2006 Rulings are consistent with the published
authority of Revenue Ruling 87-76, Reed Smith believes that it can render a
favorable opinion on the tax-free nature of the Transaction.
You have also requested that we comment on the appropriateness of the
selection of American Century New Opportunities II Fund as the accounting
survivor in the Transaction. The selection of the accounting survivor was made
by applying the criteria outlined in the North American Security Trust, SEC
No-Action Letter dated August 5, 1994. In applying the criteria to the
Transaction, it was determined that American Century New Opportunities II Fund
was the appropriate accounting survivor because: (a) American Century Investment
Management, Inc. will continue to serve as the investment adviser to the
American Century New Opportunities II Fund; (b) the investment objective,
policies and restrictions will
Mr. Jeff Long, Securities and Exchange Commission
November 7, 2006
Page 3
continue to be those of American Century New Opportunities II Fund; (c) the
expense structure, including the determination of the fund's expense ratio, will
continue to be the expense structure of American Century New Opportunities Fund
II; and (d) the portfolio composition of American Century New Opportunities Fund
II will most resemble the current portfolio of American Century New
Opportunities Fund II. While consideration was given to the fact that Kopp
Emerging Growth Fund's net assets currently exceed the net assets of American
Century New Opportunities II Fund, such fact was not considered material enough
to outweigh the other criteria described above.
Pursuant to your request, we acknowledge that: (i) the Registrant is
responsible for the adequacy and accuracy of the disclosure in its filings; (ii)
Staff comments or changes to disclosure in response to Staff comments in the
filings reviewed by the Staff do not foreclose the Commission from taking any
action with respect to the filings; and (iii) the Registrant may not assert
Staff comments as a defense in any proceeding initiated by the Commission or any
person under the federal securities laws of the United States.
If you have any questions, please contact me at (816) 340-7276.
Respectfully,
/s/ Brian L. Brogan
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Brian L. Brogan
Vice President and
Associate General Counsel
American Century Ultra Fund - I Class (TWUIX)
Filed: 7 Nov 06, 12:00am