The Internal Revenue Service (“IRS”) has recently made known that it has temporarily suspended the issuance of private letter rulings allowing registered funds that are regulated investment companies (“RICs”) for U.S. federal income tax purposes to invest indirectly in commodities through (1) wholly owned offshore subsidiaries or (2) certain commodity-linked structured notes. The IRS has previously issued a number of letter rulings to RICs in this area, concluding that such investments generate “qualifying income” for RIC qualification purposes.

The IRS’s decision to suspend its issuance of these letter rulings reflects a reassessment of its ruling practice in this area in light of certain recent events, including the Commodity Futures Trading Commission’s (“CFTC”) examination of whether RICs using commodities subsidiaries should be required to register with the CFTC as “commodity pool operators” (see our prior Alerts from January 2011 and July 2011 for a summary of proposed CFTC rulemaking in this area), the enactment of the RIC Modernization Act of 2010 and an increase in the number of these ruling requests. It is unclear how much of a role pressure from the CFTC had in the IRS’s decision.

The IRS is still accepting new ruling requests from RICs in this area — indeed, we understand that it has suggested applicants continue to file such requests, to “get in line” — but no action will be taken on them while it reassesses its ruling practice. It is unclear how long this suspension will last. The IRS has not indicated that any previously issued rulings in this area will be affected by this suspension.

Unless and until the IRS resumes issuing letter rulings in this area, a RIC that does not already have a letter ruling and wishes to invest indirectly in commodities through the use of a commodity subsidiary or structured notes has one or two alternatives. First, a RIC using a subsidiary can currently repatriate the subsidiary’s earnings constructively “brought back” each taxable year under the so-called “Subpart F” rules of the Internal Revenue Code. Second, a RIC seeking to use either a commodity subsidiary or structured notes can seek an opinion of counsel, at a level of confidence sufficient to satisfy the RIC’s accountants and board, that the RIC’s indirect investment in commodities generates “qualifying income.”