Under IRC Section 851, mutual funds have preferential tax status allowing them to avoid payment of any corporate income tax, so long as they derive at least 90 percent of their gross income from securities sales, which means that they can derive no more than 10 percent of their gross income from alternative investments such as commodities.
The Senator noted that an earlier hearing before the Investigations Subcommittee, which he chairs, exposed how some mutual funds have become significant investors in commodities, despite the restriction in Section 851(b)(2).The hearing showed how mutual funds, which had not historically been involved in commodities markets, began petitioning for and receiving private letter rulings from the IRS allowing them to use a variety of tactics to invest in commodities, including through derivatives. Indeed, he noted that the IRS has issued over 70 private letter rulings allowing mutual funds to treat income from investments in certain commodity linked notes or through controlled foreign corporations that invest in commodities as qualified income under Section 851(b)(2).
Senator Levin also wants the end of year legislation to close a loophole that currently allows credit default swap payments to escape taxation if sent from the
US to persons offshore, such as
hedge funds or foreign banks. Earlier this year, the Senator sponsored the Cut
Unjustified Tax Loophole Act, S 2075, which would close this swap loophole by
treating credit default swaps sent offshore from the US
as taxable US