Section 851.—Definition of Regulated Investment Company

26 CFR 1.851–2: Limitations. (Also Sections 7704, 7805; 301.7805–1.)

Regulated investment company (RIC). This ruling modifies Rev. Rul. 2006–1 to extend until September 30, 2006, the transition period provided by that ruling, and clarifies that Rev. Rul. 2006–1 was not intended to preclude a conclusion that income from certain instruments (such as structured notes) that create a commodity exposure for the holder is qualifying income under section

2006–25 I.R.B. 1133 June 19, 2006

for the calendar quarter beginning July 1, 2006, will be 8 percent for overpayments (7 percent in the case of a corporation), 8 percent for underpayments, and 10 percent for large corporate underpayments. The rate of interest paid on the portion of a corporate overpayment exceeding $10,000 will be 5.5 percent.

Rev. Rul. 2006–30

Section 6621 of the Internal Revenue Code establishes the rates for interest on tax overpayments and tax underpayments. Under section 6621(a)(1), the overpayment rate is the sum of the federal short-term rate plus 3 percentage points (2 percentage points in the case of a corporation), except the rate for the portion of a corporate overpayment of tax exceeding $10,000 for a taxable period is the sum of the federal short-term rate plus 0.5 of a percentage point for interest computations made after December 31, 1994. Under section 6621(a)(2), the underpayment rate is the sum of the federal short-term rate plus 3 percentage points.

Section 6621(c) provides that for purposes of interest payable under section 6601 on any large corporate underpayment, the underpayment rate under section 6621(a)(2) is determined by substituting “5 percentage points” for “3 percentage points.” See section 6621(c) and section 301.6621–3 of the Regulations on Procedure and Administration for the definition of a large corporate underpayment and for the rules for determining the applicable date. Section 6621(c) and section 301.6621–3 are generally effective for periods after December 31, 1990.

Section 6621(b)(1) provides that the Secretary will determine the federal short-term rate for the first month in each calendar quarter.

Section 6621(b)(2)(A) provides that the federal short-term rate determined under section 6621(b)(1) for any month applies during the first calendar quarter beginning after such month.

Section 6621(b)(3) provides that the federal short-term rate for any month is the federal short-term rate determined during such month by the Secretary in accordance with § 1274(d), rounded to the nearest full percent (or, if a multiple of ¹ /2 of 1 percent, the rate is increased to the next highest full percent).

receipt (in the event of a gain) or payment (in the event of a loss) of cash, in the net amount under the contract, and each monthly measuring period constitutes a separate derivative contract under the Master Agreements.

Rev. Rul. 2006–1 holds that a derivative contract with respect to a commodity index is not a security for purposes of section 851(b)(2) of the Internal Revenue Code and that, under the facts stated in the ruling, R ’s income from the contract is not qualifying income for purposes of section 851(b)(2), because the income from the contract is not derived with respect to R ’s business of investing in stocks, securities, or currencies. Rev. Rul. 2006–1 further provides that under the authority of section 7805(b)(8), the holding of the revenue ruling will not be applied adversely with respect to amounts of income that a taxpayer recognizes on or before June 30, 2006. It has come to the attention of the Service that some taxpayers are questioning whether the holding of the revenue ruling applies to investments by regulated investment companies (RICs) in all derivative contracts with respect to a commodity index, including for example structured notes, rather than just to the Derivatives described in the revenue ruling.

The ruling was not intended to preclude a conclusion that the income from certain instruments (such as certain structured notes) that create a commodity exposure for the holder is qualifying income under section 851(b)(2). Accordingly, to clarify the holding of Rev. Rul. 2006–1, the HOLDING section is revised to read:

A Derivative is not a security for purposes of section 851(b)(2). Under the facts above, R ’s income from a Derivative is not qualifying income for purposes of section 851(b)(2), because the income from the contract is not derived with respect to R ’s business of investing in stocks, securities, or currencies.

In addition, some taxpayers have questioned whether the prospective application of the ruling is limited to the Derivatives described in the revenue ruling or includes all derivative contracts with respect to a commodity index or an individual commodity, including, for example, commodity futures contracts. The Service has also

been informed that, due to temporary demand/supply imbalances, some RICs that had previously invested in derivative contracts similar to the Derivatives described in Rev. Rul. 2006–1 are having difficulty in acquiring alternative commodity-linked investments that result in qualifying income for purposes of section 851(b)(2).

The prospective application of the ruling was intended to apply to all derivative contracts with respect to a commodity index or an individual commodity. Accordingly, to alleviate temporary supply/demand pressure and to clarify the scope of the PROSPECTIVE APPLICATION section of Rev. Rul. 2006–1, that section is revised to read:

Under the authority of section 7805(b)(8), the holding of this revenue ruling will not be applied adversely with respect to amounts of income that a taxpayer recognizes on or before September 30, 2006, from a Derivative. Neither will the Service apply the principles set forth in this revenue ruling adversely with respect to amounts of income recognized on or before September 30, 2006, by a taxpayer from a derivative contract (including an option, futures or forward contract) on a commodity index or an individual commodity.

EFFECT ON OTHER DOCUMENTS

Rev. Rul. 2006–1 is modified and clarified.

DRAFTING INFORMATION

The principal author of this revenue ruling is Dale S. Collinson of the Office of the Associate Chief Counsel (Financial Institutions & Products). For further information regarding this revenue ruling, contact him at (202) 622–3900 or Susan Thompson Baker at (202) 622–3930 (not toll-free calls).