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Abstract: 

On December 16, 2005, the IRS released Rev. Rul. 2006-1, which concluded that income from a total return commodity index derivative financial contract was not qualifying income for purposes of the 90% qualifying income test of Section 851(b)(2) (the “qualifying income test”) applicable to a regulated investment company (“RIC”) under Subchapter M of the Code. In conjunction therewith, the IRS also issued at the same time News Release IR-2005-142. News Release 2005-142 notes that some mutual funds had entered into such commodity linked derivatives for either total-return exposure to commodities or as a partial hedge against inflation. Funds knew that they could not invest directly in commodities because income from commodities was not qualifying income under the qualifying income test. Failure of a RIC to obtain both its dividends paid deduction in computing its taxable income and the special tax-character treatment of certain dividends to its shareholders could be disastrous.

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Affiliations:  1: Conlon.