Pimco may be forced to shutter one of its funds as a result of a newly issued Internal Revenue Service ruling.

This is one of a number of possible scenarios drawn up by Newport Beach, California-based firm in response to a revenue ruling issued on December 16, which stated that income from commodity-index derivative contracts does not help a fund qualify for the tax benefits typically enjoyed by mutual funds.

In a Filing with the Securities and Exchange Commission yesterday, Pimco said that changes might be in the offing for its Commodity RealReturn Strategy Fund after the ruling takes effect on July 1, 2006.

The fund "currently gains most of its exposure to the commodities markets by entering into swap agreements on a commodities index and may invest in other commodity-linked derivative instruments," the company said in the filing.

Under the Internal Revenue Code, one of the requirements for a favorable tax treatment as a mutual fund is that the fund obtain at least 90 percent of its gross income from qualifying sources of income.

The new ruling, Pimco said, would limit the extent to which the fund may place investments in commodity-linked swaps or other commodity-linked derivatives.

The firm said it will look into a variety of "legislative, regulatory and investment alternatives" that would allow it to qualify as a regulated investment company after June 30, 2006 using its current investment strategy.

"If the fund is unable to ensure continued qualification using current investment techniques, the fund may be required to change its investment objective, policies or techniques, or cease operations," it said.

The Commodity RealReturn Strategy Fund has over $11.5 billion in assets. 

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