TAX POLICY AND FINANCIAL SERVICES CLIENT ALERT: An End to Mutual Funds Trading in Commodities?

    View Authors 7 February 2012
    Mutual funds investing in commodity-linked notes or offshore corporations that deal in commodities may soon need to alter their trading strategies. On January 26, Senator Carl Levin (D-MI) called a Senate Investigation hearing to highlight and admonish the Internal Revenue Service’s (IRS) private letter rulings (PLRs) that have characterized these types of transactions as an investment in securities. Senator Levin has accused mutual funds of maneuvering around well-established rules designed to prevent them from conducting a significant amount of transactions in commodities. Bowing to Congressional pressure, the IRS has imposed a moratorium on issuing new PLRs and last week, the U.S. Treasury Department announced that it is considering re-examining this issue and issuing formal public guidance on the matter. If so, it is likely that Treasury and the Internal Revenue Service (IRS) will rigorously review their prior decisions and perhaps put an end to allowing such investments. Such actions will have a chilling impact on mutual fund investment portfolios.