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Pepperdine University School of Law

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Thursday, September 26, 2013

Rosenthal: Private Equity Is a Business: Sun Capital and Beyond

Tax Analysys Logo (2013)Steven M. Rosenthal (Tax Policy Center), Private Equity Is a Business: Sun Capital and Beyond, 140 Tax Notes 1459 (Sept. 23, 2013):

Private equity has grown exponentially: it now controls and operates a large number of the companies in our economy. But private equity is just that: private. Its operations are confidential and difficult to parse. This article attempts to demystify the business of private equity. It also describes the unanimous decision by the 1st Circuit that a private equity fund is a trade or business for purposes of ERISA. Finally, the article discusses the tax implications of "trade or business" status for private equity funds and recommends further guidance from Treasury.

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http://taxprof.typepad.com/taxprof_blog/2013/09/rosenthal-.html

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Comments

Dear Paul Caron,
I’ve read your blog of Thursday, September 26, 2013 “Rosenthal: Private Equity Is a Business: Sun Capital and Beyond.” In it is the read “It also describes the unanimous decision by the 1st Circuit that a private equity fund is a trade or business for purposes of ERISA.”

I disagree with the 1st Circuit’s decision as the term “trade or business” is defined and as such its definition rules over the colloquial or formal English word(s) or guessing or opinions to the contrary.

On Rosenthal’s page 1462 it reads: Although the term ‘‘trade or business’’ is not defined in ERISA, the IRC, or regulations issued by the Treasury Department . . .
And
On page 1463 it reads: C. ‘Trade or Business’ for Tax Purposes
1.
Groetzinger, Higgins, Whipple, and Giblin distinguish active from passive investors. The code uses ‘‘trade or business’’ hundreds of times, without defining the phrase.
And
On page 1465 it reads: d. Three principles to identify a trade or business.
These cases establish three key principles to identify a trade or business.
And
On page 1468 it reads: And using tax authority for ‘‘trade or business’’ is warranted . . .

Well, “trade or business” is defined in Title 26 IRC §7701. Look it up and decide if the 1st Circuit’s decision would be any different if they had the “trade or business” definition under their unanimous noses.

And
On page 1465 in footnote 74:
gains of a nonresident from trading in commodities in the United States through a broker were taxable because the trading was ‘‘extensive’’ enough to be a trade or business

Gains, no matter how extensive are not taxable unless they are derived from a taxable activity. The income tax is an excise tax. The exercise of a federal privilege is the taxable activity. A gain from the private sector is not a taxable activity.

Your comment would be appreciated.
Buzz

Posted by: Buzz | Sep 26, 2013 5:29:59 PM

Sun Capital is a corporate veil piercing case; that is, whether a trade or business may be attributed to the people who own or control an enterprise in order to make them subject to creditors' remedies. The notion that Sun Capital somehow calls for a reassessment of the general tax definition of a trade or business, for purposes of claiming a loss deduction, or characterizing the deduction as capital or ordinary, as spelled out by Groetzinger, Whipple, Higgins, and related cases, is arrant nonsense.

Posted by: Jake | Sep 26, 2013 7:00:10 PM