Sun Capital

The Supreme Court has denied certiorari in the Sun Capital case.

In Sun Capital, the First Circuit ruled that the hedge fund was engaged in a trade or business.  Sun Capital owned the majority of the stock of a company that was party to a multi-employer pension plan and went bankrupt.  Under the Employee Retirement Income Security Act (ERISA), members of a controlled group of trades or businesses are liable for the employer contributions of other members of the controlled group. By holding that Sun Capital was engaged in a trade or business, the court found it liable for the contributes owed to the plan by its bankrupt company.

The Sun Capital case has implications far beyond the ERISA issue. Finding that a hedge fund is engaged in a trade or business can severely impact its investors.  For example, a tax-exempt entity is exempt from tax on investment income (interest, dividends and capital gains) but not on income earned by engaging in an "unrelated trade or business."  The taxation of a foreign person differs depending on whether the income earned by the investor is trade or business income rather than investment income.  Hedge funds are partnerships, which are not separate taxable entities.  If the income of the partnership is trade or business income, then the partners have to report that income as trade or business income and pay tax accordingly.

If the government decided to push this theory beyond the ERISA area, literally tens of billions of tax could be at stake.

Thus far, the Treasury Department has been coy about whether they are inclined to push the issue.  Up to now, all we've heard is that they are studying the case.

We'll see....