Practical International Tax Implications of Sun Capital Partners III, LP v. New England Teamsters & Trucking Industry Pension Fund for Non‑U.S. Private Equity Funds and Their Investors

Author(s): Rufus Rhoad­es and Alex­ey Man­a­suev Date: Decem­ber 2013

Back­ground.

In Sun Cap­i­tal Part­ners III, LP v. New Eng­land Team­sters & Truck­ing Indus­try Pen­sion Fund [724 F.3d 129 (1st Cir. 2013)], the First Cir­cuit held that one of two pri­vate equi­ty funds (the two funds were Sun Cap­i­tal Fund III and Sun Cap­i­tal Fund IV) with an invest­ment in a port­fo­lio com­pa­ny man­aged and oper­at­ed by such funds was a trade or busi­ness for pur­pos­es of with­draw­al lia­bil­i­ty under the Employ­ee Retire­ment Income Secu­ri­ty Act of 1974 (“ERISA”), 29 U.S.C. §1001 et seq (as amend­ed). In hold­ing so, the First Cir­cuit reversed the deci­sion of the dis­trict court that Sun Cap­i­tal Fund IV (“Fund IV”) was not a trade or busi­ness and remand­ed the case to the low­er court for fur­ther pro­ceed­ings on the issue of com­mon con­trol and for addi­tion­al fact find­ing to deter­mine if Sun Cap­i­tal Fund III (“Fund III”) were a trade or busi­ness.

The case is inter­est­ing from the inter­na­tion­al tax per­spec­tive because the “trade or busi­ness” analy­sis may have inter­est­ing impli­ca­tions for non‑U.S. pri­vate equi­ty funds and their non‑U.S. investors, lim­it­ed part­ners in such funds, that may include tax-exempt enti­ties and sov­er­eign wealth funds.

The Facts.

Sun Cap­i­tal Advi­sors, Inc. (“SCAI”), a pri­vate equi­ty firm, iden­ti­fied Scott Brass, Inc. (“SBI”), a man­u­fac­tur­er of coil and brass prod­ucts, as a poten­tial port­fo­lio invest­ment. In 2007, SCAI struc­tured the invest­ment and acquired SBI through two affil­i­at­ed pri­vate equi­ty funds, Fund III (30 per­cent own­er­ship in SBI) and Fund IV (70 per­cent own­er­ship in SBI). Fund III and Fund IV did not have any offices or employ­ees of their own.

The share­hold­ers of SCAI were the sole mem­bers of the part­ner­ship that was a gen­er­al part­ner (“GP”) in both funds. Fur­ther, the GP whol­ly owned a man­age­ment com­pa­ny that pro­vid­ed man­age­ment ser­vices to SBI and the funds. The man­age­ment com­pa­ny hired …

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