Private Equity Funds Face Tax Threat as Court Eyes Active Management

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Investors took notice last month when the U.S. Court of Appeals for the First Circuit ruled unanimously that two private equity funds were not just investors in a business but because of their active management style were engaged in a “trade or business,” opening a possibility that the funds could also see their tax rates double if the Internal Revenue Service follows suit.
The court's ruling on the case involving Sun Capital, penned by Chief Judge Sandra Lynch, used an “investment-plus” analysis to find that one of the private equity funds qualified as a trade or business under the Multiemployer Pension Plan Amendments Act (MPPAA). Observers believe Lynch's ruling may have significant tax ramifications for private equity funds going forward.
“The case addressed the question of whether private equity funds are actively engaged in a trade or businesses or mere passive investors,” Steve Rosenthal, visiting fellow at the Tax Policy Center, told BNA Aug. 9.
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