[author: Angela Bohmann]

I blogged earlier in the year about a decision in which a district court concluded that various related companies were part of a controlled group of trades or businesses and therefore liable for the withdrawal liability of one of the companies. In that case, the court noted that to be a trade or business the taxpayer’s activities had to be different from “investment activities or hobbies.” Now comes a different district court opinion that reaches a contrary conclusion. The case is Sun Capital Partners III L.P. v. New England Teamsters and Trucking Industry Pension Fund from the District of Massachusetts.

The Sun Capital case involves a private equity fund that had made an investment in a company that participated in a multiemployer pension plan. When that business withdrew from the pension fund and was unable to pay the withdrawal liability, the pension fund sued seeking to hold the private equity fund and its other investments liable for the withdrawal liability. The district court rejected the pension fund’s contention and held that the private equity fund’s investment in a trade or business did not cause the fund’s activities to constitute a trade or business. Therefore, there was no controlled group of trades or businesses and the equity fund was not liable for the unpaid withdrawal liability.

In reaching this conclusion, the district court rejected as unpersuasive a Pension Benefit Guaranty Corporation (PBGC) Advisory Opinion from 2007 that had concluded that a private equity fund that invested in other businesses was itself conducting a trade or business.

This new case provides support to hedge funds and other private equity funds that their portfolio companies are not part of a controlled group of trades or businesses for withdrawal liability and possibly other controlled group testing purposes. It will be interesting to see how these cases play out at the appeals court level.