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October 2, 2013
Tax Analysts Hosts Conference on Private Equity as a Trade or Business: The Sun Capital Decision

WASHINGTON, D.C. – Tax Analysts, a nonpartisan, nonprofit organization that provides tax news and analyses, held a conference Friday at the National Press Club at which an esteemed panel of tax experts discussed the “trade or business” analysis as it applies to tax law.

The panel discussion, which Tax Analysts President and Publisher Christopher E. Bergin moderated, included presentations by Patrick B. Fenn, partner at Akin Gump Strauss Hauer & Feld LLP; John C. Hart, partner at Simpson Thacher & Bartlett LLP; Steven M. Rosenthal, visiting fellow at the Urban-Brookings Tax Policy Center; Stephen E. Shay, professor of practice at Harvard Law School; and Lee A. Sheppard, contributing editor for Tax Analysts.

In their presentations and in the subsequent discussion with the audience, the speakers focused on what would happen if private equity funds are found to be in a trade or business for tax purposes, which could threaten capital gains treatment benefiting fund managers and investors.

“Trade or business matters a lot. Sun Capital was really important for the tax interpretation of trade or business, not just for the ERISA,” said Rosenthal.

“There’s a different risk profile today than there was before that case was decided, and to say otherwise is not being objective about it,” said Shay. “If the Sun Capital analysis is pushed and it were concluded in the income tax context that a private equity fund management fee offset should be treated as income from services, then that’s going to affect the foreign investors.”

But Fenn argued that if funds are found to be in a trade or business, “the government might be a loser in that result more than a winner.” A trade or business finding would not mean that the character of the fund income would change, but domestic taxpayer investors would be able to deduct their share of management fees, he said.

Sheppard said the fee offset issue was critical. The general partner is “taking fees, and those are being attributed to the investors in this case, and that’s a common arrangement and that does matter,” she said.

Hart said he doesn’t buy the idea that the fee offset puts the fund in a trade or business. Calling fee offsets “completely commercial,” he said, “There’s nothing about that that means that the fund is getting a benefit and should be subject to a completely different tax regime.”

Media Notes: The video and transcript of the conference are available at Tax Analysts’ event page, or contact Shaima Cardillo at 703-531-4852 or Follow Tax Analysts on Twitter @TaxAnalysts.

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