On September 27, 2016, the Internal Revenue Service (“IRS”) issued proposed regulations (the “Proposal”) and a related revenue procedure concerning the good income and the asset diversification requirements for qualification of a fund as a regulated investment company (“RIC”).

Pursuant to the new revenue procedure, the IRS will no longer rule on whether a specific financial instrument or position held by a RIC constitutes a “1940 Act security” for purposes of the good income or asset diversification requirements. In the Proposal, the IRS requests comments on whether it should withdraw previously issued published guidance that involved determinations of whether a financial instrument or position held by a RIC was a 1940 Act security, including, in particular, Rev. Rul. 2006-1 and Rev. Rul. 2006-31 (relating to commodity swaps and certain derivative instruments based on the value of a commodity or commodities). The IRS also has started to contact taxpayers that have received private rulings regarding whether certain commodity-linked notes constitute 1940 Act securities, to inform them that these rulings will be revoked.

The Proposal provides that so-called subpart F income inclusions (including generally in respect of passive income), triggered by a RIC’s investment in a controlled foreign corporation, constitute good income only to the extent such income is currently and timely repatriated to the RIC. In the Proposal, the IRS explained that a contrary position is without support in Section 851(b) of the Internal Revenue Code of 1986, as amended. The proposed regulations are contrary to the conclusion reached by the IRS in a number of private letter rulings, issued from 2006 to 2011, that subpart F income inclusions constituted good income even in the absence of current repatriation.

The new revenue procedure concerning rulings on whether an instrument or position constitutes a 1940 Act security is effective immediately. The proposed regulations on subpart F income inclusions, if finalized as proposed, will be effective for taxable years that begin on or after the date that is 90 days after the date final regulations are published in the Federal Register. The Proposal does not specifically address whether a RIC that received a private letter ruling between 2006 and 2011 may continue to rely on such ruling in light of the Proposal. An IRS official indicated informally that such a RIC can rely on its ruling until the effective date of the final regulations.