The U.S. Supreme Court is being asked to weigh in on an issue that could have wide-ranging effects on the pooled investment fund industry.  Three private equity funds organized by Sun Capital Advisors, Inc., have filed a petition for a writ of certiorari, asking the Supreme Court to reverse a decision of the U.S. Court of Appeals for the First Circuit that held that the separate activities of a private equity fund’s manager caused the fund managed by such manager to be engaged in a “trade or business.”  While the case addresses the “trade or business” issue in an ERISA context, the determination of when a fund is engaged in a “trade or business” could have significant tax ramifications for the fund industry, potentially affecting fund formations, future fund operations, and sources of capital.

In Sun Capital Partners III LP v. New England Teamsters & Trucking Industry Pension Fund, 724 F.3d 129 (1st Cir. 2013), the First Circuit applied an “investment plus” approach that took into account the activities of the general partner to determine that Sun Capital Partners IV, LP was engaged in a trade or business for purposes of ERISA.  Although the case did not directly address the definition of a “trade or business” for tax purposes, the First Circuit analyzed the applicable federal tax authorities (including Supreme Court precedent) and concluded that its approach was entirely consistent with those authorities. The Sun Capital funds are now asking the Supreme Court to overturn this ruling and find that the “investment plus” approach of the First Circuit is not the proper test.  Rather, the Sun Capital funds believe that because they were receiving solely investment income, they could not be treated as engaged in a trade or business under Supreme Court precedent.