During the closing days of 1998, as Internet stocks soared, Alberto Vilar's


Amerindo Technology mutual fund got so hot that, for a time, it ceased to exist as a mutual fund under tax law.

The fund briefly became a corporation, as far as tax laws were concerned, because its holdings in



ballooned to 43% of its assets as of Dec. 31 -- far above the 25% threshold allowed in a single holding for a mutual fund. Vilar apparently just couldn't buy enough of the stock.

But through some clever maneuvering, Amerindo Technology managed to regain its mutual fund tax status. It elected to shift the end of its fiscal year -- a once-every-10-years move allowed under tax law -- from Dec. 31 to Oct. 31, 1998. In doing so, Amerindo changed its reporting date to a time when it met the law's diversification requirements and bought itself more time to ride Yahoo!'s surging stock.

Shareholders didn't notice a thing as the events were happening, but this January, they were hit by an aftershock. A letter to shareholders warned of a potentially huge short-term

distribution of $5.94 per share -- one-third of the fund's net asset value at the time. Amerindo finally had run out of time and was forced to sell some of its highly appreciated Yahoo! shares by its Jan. 31 quarterly reporting date.

As a result, shareholders could get stuck with a big capital-gains tax bill, though it's possible the distribution could be reduced in size by the time it's made -- sometime before Oct. 31 of this year.

What happened at Amerindo offers a glimpse of how a fund manager, through sophisticated accounting, can push the boundaries of tax law to make a huge bet on one stock.

While the large potential distribution may have been unwelcome news to shareholders, Amerindo's taste for risk should have been no surprise. The fund spells out clearly in its prospectus that it is a nondiversified, concentrated portfolio and that its philosophy carries heightened risk.

That became very apparent in December, when


reported on the huge Yahoo! stake Vilar had built up. At that time, the position was getting so big it appeared the fund could lose its status as a regulated investment company. That status allows a mutual fund to pass its capital gains on to shareholders.

When calculating the tax bill, a regulated investment company, or RIC, can subtract total distributions from any taxable income generated. Tax experts say the goal is to distribute as much as possible to shareholders to avoid paying income tax at the company level. Shareholders are then liable for taxes on the distributed gains.

Had Amerindo lost its RIC status, it would have owed taxes on its gains, and those increased costs could have been passed on to shareholders through a higher expense ratio for the fund.

To remain an RIC, a mutual fund can't put more than 25% of its assets in any one stock, according to

Section 851 of the tax code. That rule applies only when the fund buys a stock. Once it's in the portfolio, subsequent appreciation in value can't cause a lapse in compliance.

Funds need to be in compliance with these diversification rules only four times a year, when they report holdings at the end of each quarter.

By Dec. 31, 1998 -- a year in which Amerindo's concentrated holdings in just 14 stocks produced an 84.7% return -- Vilar's fund was not diversified enough. It tripped into noncompliance because of its Yahoo! holdings, says Mike Miola, president of

American Data Services

, the fund's administrator.

"For the year ended Dec. 31, 1998, the fund did not qualify as a regulated investment company," Amerindo said in its annual report to shareholders, filed with the

Securities and Exchange Commission

March 1. But at that point, it didn't matter because the fund's management had elected to change the fiscal year-end from Dec. 31 to Oct. 31, 1998.

But even if Amerindo had lost its RIC status, it would not have been hit with a big tax bill because the fund was carrying losses -- it had a down year in 1997 -- that outweighed its 1998 gains, says Amerindo spokesman Keith Brown. Many of these gains weren't realized until January 1999, when Amerindo sold part of its Yahoo! stake.

"As of Jan. 31, 1999, the fund sold certain securities and realized a substantial short-term capital gain on the sale," Amerindo reported in a supplement to its prospectus filed Feb. 5. Miola confirms that Amerindo dumped some of its Yahoo! shares to meet diversification requirements. Vilar was not available for comment over the course of two business days for this story.

Further, Amerindo's annual report said the fund intends to qualify as a registered investment company in the future, so investors shouldn't have to worry about an unanticipated change in the fund's tax status. Brown, the Amerindo spokesman, says the fund's Yahoo! holdings were pared to "standard diversification" levels.

Tax experts say Amerindo's tax maneuvering was clever and well within the bounds of acceptability.

"From my perspective, I think they should be complimented on this," says Jim Calvin, an investment management tax partner at

Deloitte & Touche

in Boston. "That's some pretty good tax planning."

Calvin says the tax code provides a one-time chance every 10 years for companies to change their fiscal year-end with no questions asked. After that, companies can petition to have another change made, but the

Internal Revenue Service

will review it.

Miola says Amerindo decided to make the shift in its year-end to get the most out of its concentrated position in Yahoo!, a stock that has risen in value by 740% in the past year. "The performance was so good they felt it was in the best interest of the shareholders not to qualify

as a registered investment company so they could maintain that position," Miola says.

Using the one-time change in the fiscal year can be a good vehicle for mutual funds having problems meeting diversification requirements, says Mari Ferris, a partner at accounting firm

McGladrey & Pullen

in New York.

"It's not every day that funds have RIC problems," Ferris says. "But when you have an RIC problem, that's one of your options. There's nothing sinister about that. That's just acting in the best interest of your shareholders."