May 22, at Kirschner v. JPMorgan Chase Bank, NA, the SDNY applied the “family resemblance test” articulated by the Supreme Court in Reves v. Ernst & Young to conclude that the syndicated loans were not securities for securities law purposes. (For a detailed discussion, see our Memo customers and friends.) This decision sheds light on the tax legislation applicable to foreigners who invest in primary market debt.
The IRS says the regular granting of loans to the public (either directly or through an agent or partnership) is a business or business in the United States that can subject a foreigner to US tax. In contrast, the tax code provides that buying and selling “securities” in the secondary market is not a transaction or business in the United States (the safe haven rule for securities trading), and tax regulations define titles as including any “proof of indebtedness”.
At first glance, it is difficult to reconcile the IRS ‘position on loans with the broad definition of security. However, the tax definition of securities for this purpose is essentially similar to the corresponding definition in the Securities Act of 1933. Notes evidencing loans made by commercial banks for day-to-day operations are not securities within the meaning of of the 1933 Act, because the Act was designed to protect investors who invest in securities and not to protect banks and other institutional investors who make quick payback period. Since the 1933 Act and the Safe Harbor for Securities Trading use similar language to define securities and the definition in the 1933 Act excludes lending, it would be reasonable to assume that securities in the meaning of the law of 1933 are also transferable securities within the meaning of securities trading. Safe Harbor.
Based on this analysis, a number of arrangers have structured investments to look more like securities than loans. Dreams family resemblance test, so that foreign funds and other foreign investors can conclude that the investments did not result in a trade or business in the United States for them. By reaffirming that syndicated loans are not securities, Kirschner preserves the viability of using the definition of securities from securities law to make sense of the IRS’s position on commerce or business in the United States.