- 1. ECI: Effectively Connected Income. if fund is treated as engaging n a business then income from that fund will be taxable to foreign investors.
- -foreigners hate this b/c capital gains in general are not taxable but if non-US person you have to file a US tax return if engaged in a business
2. Tax exempt investors: don't want to be subject to an audit b/c if goes straight to them will have to pay income tax on it. They call this: Unrelated Business Taxable Income (UBTI).
3. Unrelated Debt Finance Income. UDFI. If a tax exempt entity borrows $, leverages
Sun Capital Case: argued that PE firm is an active investor, engaged in a business. Counter argument is that it is more like inventory: buying company just to sell it, sounds like inventory. Another argument is that fund isn't an investor it's a dealer (Nissan says this goes to far).
Before Sun Capital, Funds were never considered "engaged in a business" but the ERISA argument that they were is similar to that which IRS would use to attack fund so now set up blockers and have blockers for UBTI, ECI & UDFI
*important to note do not have blocker sitting right between the Fund and the LLC b/c would block ALL the funds