Press Room: Tax Release
Foreign Investors Sink in Trading Safe Harbor
The Internal Revenue Service (IRS) released an extensive 24 page Chief Counsel Advice (CCA) (ILM 201501013) concluding that certain commercial lending and stock distribution activities constituted a “trade or business” within the U.S. of a limited partnership (the “Fund”).
The CCA found that the Fund’s U.S. business operations consisting of:
(1) lending, and
(2) stock distribution activities (“dealer activities”)
did not qualify for the “Trading Safe Harbors,” provided to certain non-U.S. investors and resulted in taxable U.S. business activities for the Fund, and its partners, including its non-U.S. investors.
In summary, the Fund, through its “fund manager,” engaged in commercial lending and stock distribution activities within the U.S. on a considerable, continuous, and regular basis. Those activities were neither investment activities, nor “trading in stock and securities” as that term is used in the Trading Safe Harbors. Rather, the Fund’s extensive lending and underwriting activities caused the Fund to be engaged in a trade or business within the U.S. and as partners in the Fund, its non-U.S. investors were also engaged in a U.S. trade or business.
A CCA, by definition, is the IRS’s view of the tax law as applied to the facts presented in a specific taxpayer’s circumstances. It does not carry the precedential value of the tax law itself, or a court decision concluding directly upon a set of similar facts.
However, the CCA’s conclusions on facts presented are so consequential to common U.S. investment structures that this CCA will be extremely controversial throughout the U.S. investment community.