Thursday, November 01, 2012

Sen. Levin Urges House and Senate Tax-Writing Committees to Use Deficit Reduction Legislation to Close Swap and Mutual Fund Commodity Trading Loopholes

In a letter to House and Senate Chairs of the tax-writing committees, Senator Carl Levin urged the closing of tax loopholes as part of deficit reduction legislation to be considered in the upcoming lame duck session of Congress, including a loophole allowing mutual funds to dodge limits and taxes on commodity speculation by routing their commodity activities through offshore shell corporations. In a letter to Senate Finance Committee Chair Max Baucus (D-MONT) and House Ways and Means Committee Chair Dave Camp (D-MI), copied to Treasury Secretary Tim Geithner, Senator Levin also urged the closing of a tax loophole allowing US financial firms to treat swap payments received from the United States as non-taxable foreign source income.

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 source income.