Commodity Funds Win More Time From IRS

Commodity mutual funds that invest in index-linked derivatives have a little longer to switch gears, the Internal Revenue Service has ruled, according to The Wall Street Journal. Last year, the regulator demanded that mutual funds that invested in commodities derivatives change their strategies.

Mutual funds are required to invest only in securities, bonds and stocks that provide "qualifying income," and derivatives don't count, the IRS has ruled.

Initially, the IRS set the deadline for June 30; however, many fund managers complained they were having trouble placing money in time. The new deadline is Sept. 30.

At stake for funds such as Pimco's  $12-million Commodity Real Return Strategies are certain, significant, tax benefits.

In attempting to convert their holdings, many funds have turned to a series of complicated notes. Each note must be negotiated with its issuer, and there are only a few sources.

Such bottlenecks caused the Oppenheimer Real Asset Fund to close recently. "We hope to open [the fund] around the end of the year," said Jeaneen Pissara, a spokeswoman for the company, noting that managers are still assessing their options.

Pimco said that it is not having trouble placing its funds. "The current state of issuers has been sufficient to meet our needs for notes and we are also continually seeking to expand the number of available issuers that meet the fund's credit quality standards," fund manager Robert Greer wrote in a note to shareholders posted on the fund's website.

The IRS has not yet determined whether the commodity notes are acceptable.

To hedge against a ruling negating the use of these funds, Rydex Investments and Credit Suisse Group  have sought private letter rulings that allow them to pursue types of  commodities-linked notes.