IRS Notice 97-18 Clarifies Excise Tax Liability and Reporting Obligations
Venture capital and other securities investment funds organized as domestic partnerships (“Domestic Funds”) often have foreign persons as limited partners. In addition, domestic fund managers often establish investment partnerships outside the United States (“Offshore Funds”). In recent months, there has been substantial controversy surrounding: (i) the potential application of a 35 percent excise tax (the “Excise Tax”) under Section 1491 of the Internal Revenue Code (the “Code”) in respect of Domestic Fund distributions to certain foreign limited partners; and (ii) reporting obligations (the “Reporting Obligations”) under Section 1494 of the Code in respect of capital contributions by domestic persons to Offshore Funds as well as Domestic Fund distributions subject to the Excise Tax.
On February 24, 1997, the Internal Revenue Service released Notice 97-18, which addresses these issues as well as certain others arising under Sections 1491 and 1494 of the Code. This memorandum briefly describes the background to Notice 97-18, its impact on Domestic and Offshore Funds, and the steps that such funds should take to deal with remaining uncertainties.
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