IRS Concludes Certain Investment Activities Give Rise to U.S. Trade or Business

The Internal Revenue Service (IRS) recently released a Chief Counsel Advice (CCA) memo addressing whether certain lending and stock underwriting activities of a foreign partnership (fund) conducted on its behalf through its U.S. fund manager constitute a U.S. trade or business. In CCA 201501013, the IRS concluded that these activities do not qualify for the Trading Safe Harbors exception under Code Sec. 864(b)(2)(A). The foreign partner, a foreign corporation, is attributed the activities from the foreign partnership. As a result, the foreign corporation is deemed to be engaged in a U.S. trade or business and is subject to U.S. federal income tax on income effectively connected with the conduct of a U.S. trade or business.

Who is affected?

This CCA generally does not apply to most investment funds. However, funds that are engaged in certain activities, other than trading in securities, as specified in the CCA may be affected.

What is the impact?

A CCA reflects the IRS Chief Counsel’s interpretation of the tax law as it pertains to the facts in a specific taxpayer’s situation. Although a CCA carries no weight under the law and cannot be cited in court, the IRS Chief Counsel could try to challenge you on an issue addressed in a CCA. If you have questions or concerns about how this CCA might affect your fund, contact me or another member of Kaufman Rossin’s financial services team.