Foreign Fund Was Engaged in a Trade or Business in the United States as a Result of Lending and Underwriting Activities: IRS Releases Chief Counsel Advice Memorandum 201501013, Treating a Foreign Fund with No Employees as Engaged in a Trade or Business in the United States Through the Lending and Underwriting Activities of the Fund’s Manager, and Clarifying Trading Safe HarborsSullivan & Cromwell LLP - January 26, 2015
On January 2, 2015, the Internal Revenue Service (the “IRS”) released Advice Memorandum 201501013 (the “Advice Memorandum”) from the Office of Chief Counsel. The Advice Memorandum concludes that a partnership was engaged in a U.S. trade or business through lending and underwriting activities conducted by the Fund’s manager (the “Fund Manager”) on behalf of the Fund. The result would be that the Fund’s partners were each subject to U.S. income tax return filing requirements and net-basis taxation on their respective portions of the Fund’s income that was effectively connected with that U.S. trade or business. In coming to these conclusions, the Advice Memorandum argues for a more limited interpretation of when foreign persons can deal in stocks and securities in the United States without becoming subject to U.S. net-basis income tax on income from that activity.
More specifically, the Advice Memorandum concludes that (i) the Fund was engaged in a trade or business in the United States as a result of lending and underwriting activities conducted by the Fund Manager on behalf of the Fund; (ii) the Fund’s lending and underwriting activities did not constitute “trading in stocks or securities” activities within the meaning of two statutory safe harbors pursuant to which activities conducted by or for a foreign person that might otherwise constitute a trade or business within the United States are treated as not being a trade or business within the United States (the “Trading Safe Harbors”); and (iii) even if the Fund’s lending and underwriting activities constituted “trading in stocks or securities” within the meaning of the Trading Safe Harbors, the Fund would have been ineligible for the Trading Safe Harbors as a result of the Fund’s status as a “dealer” and its grant of discretionary authority to the Fund Manager to conduct lending and underwriting business in the United States on the Fund’s behalf.