"IRS Issues New 'No Rule' Area and Related Proposed Regulations: Potential Implications for Regulated Investment Companies"

On September 27, 2016, the Internal Revenue Service (the “IRS”) issued proposed regulations under Section 851 of the Internal Revenue Code of 1986, as amended (the “Code”) (the “Proposed Regulations”) and a related Revenue Procedure impacting the ability of regulated investment companies (“RICs”) (particularly, RICs seeking to generate commodity market exposure) to satisfy the gross income and asset diversification tests for RIC status under the Code. 

As discussed in this Stroock Special Bulletin, the Revenue Procedure establishes a new “no rule” area that impacts the definition of “security” for purposes of the RIC qualification tests under Subchapter M of the Code.  This Stroock Special Bulletin further discusses the Proposed Regulations that, among other things, will have the effect of requiring certain foreign entities in which a RIC invests (including offshore commodity investment subsidiaries) to make current distributions to match the RIC’s income inclusions in respect of those foreign entities.