We learned last week that the Internal Revenue Service (“IRS”) has imposed an informal moratorium on private letter rulings for regulated investment companies (“RICs”) that invest in commodities through foreign subsidiaries or structured notes, presumably because the government is reconsidering the tax issues involved. There is no way to tell how long the moratorium will last, or whether the IRS will change its position on issuing these rulings—to date, more than 50 have been issued.


Almost all mutual funds are formed as RICs under the Internal Revenue Code of 1986 (“Code”). To qualify as a RIC, an entity must (i) be domestically organized, (ii) be registered under the Investment Company Act of 1940, (iii) meet an asset test,8 (iv) meet an income test,9 and (v) elect to be taxed as a RIC.  

In Rev. Rul. 2006-1,10 the IRS ruled that a commodity swap produced “bad,” i.e., non-qualifying RIC income. In response to industry concern that Rev. Rul. 2006-1 precluded any commodities exposure for a RIC, in April 2006 the IRS issued what is now known as the “Rydex ruling.” The Rydex ruling concluded that (i) if a RIC formed a foreign corporation that bought commodities and entered into commodities swaps, then even though the commodity investments (if held directly) produced “bad” RIC income, the stock of the foreign corporation would be a “good” RIC asset that produced “good” RIC income11 and that (ii) a structured note that gave a RIC exposure to commodities was a “security” under the Investment Company Act of 1940 and, therefore, was a “good” RIC asset that produced “good” RIC income.

Earlier versions of the recently passed RIC Modernization Act of 2010 (the “Act”) contained a provision permitting RICs to invest directly in commodities, but the final version of the Act did not.

Current Developments

While the IRS has temporarily suspended issuance of RIC commodities rulings like those described above, the IRS has not made any formal announcement nor has it added the RIC commodities issues to the “no-rule list.” Apparently, the IRS will accept ruling requests that are filed; however, it is unclear when (if ever) such ruling requests will be acted upon. Moreover, no action has been taken to revoke currently outstanding private letter rulings.12 While there is speculation about the government’s reasons for the moratorium, the specific reasons for the action (or better, the inaction) are unclear.