[Congressional Record Volume 152, Number 124 (Thursday, September 28, 2006)]
[Extensions of Remarks]
[Pages E1865-E1866]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




 AMENDING THE INTERNAL REVENUE CODE OF 1986 TO TREAT INCOME EARNED BY 
MUTUAL FUNDS FROM EXCHANGE-TRADED FUNDS HOLDING PRECIOUS METAL BULLION 
                          AS QUALIFYING INCOME

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                           HON. PHIL ENGLISH

                            of pennsylvania

                    in the house of representatives

                     Wednesday, September 27, 2006

  Mr. ENGLISH of Pennsylvania. Mr. Speaker, today I introduced 
legislation to update the Internal Revenue Code mutual fund rules to 
clarify that a mutual fund is permitted by the tax rules, as they are 
by the securities law, to invest in publicly traded securities 
representing interests in trusts holding precious metal bullion, such 
as gold.
  Beginning in November 2004, the Securities and Exchange Commission 
has permitted the registration of securities representing equity 
interests in trusts holding precious metal (gold and silver). These 
securities now trade on the New York Stock Exchange and the American 
Stock Exchange. They did not exist at the time the mutual fund tax 
rules were most recently amended by Congress.
  These investments share the same essential characteristics as other 
securities that give rise to good income for mutual funds under the 
Internal Revenue Code. In particular, they are clearly ``securities'' 
for purposes of the Investment Company Act of 1940, and under the 
mutual fund tax rules, gain on sale of ``securities'' is clearly good 
income for the mutual fund.
  However, because the bullion funds are treated as ``grantor trusts'' 
for income tax purposes, it is not clear whether the income from these 
securities would be considered qualifying income under the Internal 
Revenue Code Section 851(b) mutual fund rule that requires that 90 
percent of the income of the mutual fund must be from securities and 
other specified passive investments. The Tax Code provisions applicable 
to grantor trusts generally treat the shareholder, ``grantor,'' as 
owning directly the underlying assets of that trust, rather than owning 
merely its equity interest in the trust, even when the shares in the 
trust are traded as securities on the major exchanges. As a result, a 
mutual fund's income from such an investment, including gain on sale, 
could be considered nonqualifying income. Excessive nonqualifying 
income would destroy the mutual fund's qualification as a mutual fund 
and subject the fund income to a layer of tax at the fund on the same 
income that is also taxed to the shareholders.
  The bill updates the Internal Revenue Code to correct that problem 
for securities holding precious metal bullion. It provides that the 
income derived from any interest in such a trust, including gain on the 
sale of such an interest, is considered qualifying income for purposes 
of the 90 percent rule. To qualify under this amendment, at least 95 
percent of the holdings of the trust must be in the form of precious 
metal bullion.

[[Page E1866]]

  As a result, individuals and pension plans that invest through mutual 
funds will have access to these types of investments in bullion when 
the mutual fund manager wants to make those investments.
  The amendment would be effective for tax years beginning after date 
of enactment.

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