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.
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 …