Limited Partners

My name is Terry Mumford. I'm a partner with Ice Miller LLP. We work with governmental pension plans across the country – single employer, multiple employer, multiemployer. We have been and will continue to be assisting our clients in preparing written comments on the ANPRM.

My goal today is to bring to your attention the issues that we have seen so far that are causing concern among our clients. 

1. A. Governmental pension plans do not want to get caught between a rock and a hard place. That is, they don't want the eventual final regulations to put them in the difficult situation where one set of laws is going one way and the final regs are going another. Here are some examples:
   1. Most the plans that we work with view an IRC section 115 ruling as sufficient evidence that the employer is governmental. Therefore, this should be a safe harbor.
   2. The same would go for an entity that has been determined by the Social Security Administration to be covered by a 218 agreement, or a modification. That should be enough without reviewing other factors.
   3. The same approach would be followed if a state or federal court has ruled that an entity is a governmental instrumentality.
   4. While we do understand that the draft proposed regulations only address IRC 414(d), we ask that the Service take into consideration the issue of consistency across governmental agencies. This is a different point than the de minimis participation question. What the plans are saying here is that, if one federal agency says an entity is the instrumentality of state or local government, that should be enough for these purpose.
2. The most common concern – probably for multiple employer plans – is the potential conflict between the final regulations and state legislation. Many state laws specifically allow the participation of nonprofit entities, which may not pass the eventual 414(d) tests if those are similar to the current factors. This is an issue where many of the plans that we represent hope participating employers can be grandfathered. There is a split in opinion on how that grandfathering would be implemented – would it protect current employees only or the employer permanently?
3. We have two points that we would like to make with regard to Revenue Ruling 89-49, which relate to grandfathering:
   1. For employers and systems who are fortunate to have PLRs under 89-49, we believe that all of these would be protected forever.
   2. For pension plans that have been applying a good faith interpretation of 414(d), including specifically 89-49, in terms of evaluating participating agencies, we believe that those decisions should remain undisturbed by the final regulations.
   3. When proposed regulations are issued, we believe that good faith interpretations of those proposed regulations should also be protected.
4. Now for some final points for what it should mean to be an entity that is grandfathered into a governmental plan – a grandfathered entity and its employees should be treated for all purposes as a non-grandfathered entity: For example:
   1. 1. ERISA wouldn't apply.
   2. Special IRC governmental provisions would apply – 415(b), 401(a)(17).
   3. Pick-ups
5. I also want to comment on the concept that a governmental plan must be established and maintained by the governmental employer. There are two scenarios here that should be approved in the final regulations, perhaps via one or more examples.
   1. The pension plan for bargaining unit employees that its governed by a labor-management board -- This should be a governmental plan if the employer is a governmental entity.
   2. The pension plan that is maintained by an entity that is separate from the governmental employer should be treated as a governmental plan. This is a very common structure across the country – designed to assure even-handed administration and protection of fiduciary responsibility.
6. In this context we also want to address the issue of the governmental employees that could be covered in a governmental plan We believe that a governmental plan could include the following employees of a governmental employer: The employer's employees; the employees that the employer leases FROM another entity; the employees that the employer leases TO another entity.
7. In closing, I would like to deal with specific IRS procedures.
   1. First, I would like to make a suggestion with regard to the next Cycle C – which will close in less than 2 years. Based upon what we've been told, it is unlikely that the regulations will be finalized by then. To continue to encourage governmental plans to obtain and maintain their determination letters, it would seem to make sense for the IRS to allow governmental plans to enter the next Cycle C on the same basis that they were allowed to enter the past Cycle C – what might be called as "self-identified" governmental plans.
   2. Finally, our clients would urge you to institute a ruling procedure as soon as possible after the issuance of the final regulations.
       

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On March 15, 2012, the Internal Revenue Service conducted one of two scheduled town hall meetings to allow public testimony and Q&A with regard to the Advanced Notice of Proposed Rulemaking (ANPRM) that was issued November 8, 2011 regarding the definition of governmental plans under IRC Section 414(d).  Reg. 157714-06, 76 Fed. Reg. 69172, https://federalregister.gov/a/2011-28853. At this town hall meeting, held in Oakland CA, Terry Mumford presented these remarks.  Presenters were limited to 7 minutes each, so Terry could only hit the highlights of client concerns.  Ice Miller will be filing more detailed, complete comments prior to the deadline for comments – June 18, 2012.

My name is Terry Mumford. I'm a partner with Ice Miller LLP. We work with governmental pension plans across the country – single employer, multiple employer, multiemployer. We have been and will continue to be assisting our clients in preparing written comments on the ANPRM.¹ And as a firm we will file a formal comment letter. I appreciate very much the opportunity to speak to you today.

At the Town Hall meeting in Oakland, I presented you with an overview of many issues that our clients are facing with regard to the definition of a governmental agency or instrumentality. My goal today is to focus on issues that our clients are facing with respect to the participation of non-profit entities in governmental plans. At the outset, I would note that I have read ERISA Advisory Opinion 2012-01A² . I do not believe that my comments are inconsistent with that letter, but I'd be happy to provide any clarification on that point.

1. Our clients believe that the final regulations should clearly recognize that a non-profit corporation can be a participant in a governmental plan if it is also treated as a governmental entity. The examples in the draft proposed regulations paint a pretty bleak picture for non-profit entities' participating in a governmental plan. Our clients believe that the final regulations should provide more examples of when a dual status entity may participate in a governmental plan.
2. Our clients have observed that a number of truly governmental functions are being performed by non-profit entities. The Service has heard and received extensive testimony on behalf of charter schools. In addition to the education field, non-profits in many states perform governmental functions in other fields. Also, many legislatures, governors, local governing bodies, and mayors have provided for participation in governmental plans by these non-profits that perform governmental functions. It seems that the draft proposed regulations do not fully recognize the current relationship between non-profits and governmental entities, which has evolved over the decades. We view this as part of the modernization that Ms. Kinard³ referenced. We would suggest the following revisions for the proposed regulations to achieve that recognition.
   1. 1. We believe that because policy makers focus primarily on the question – does the entity serve a governmental purpose? – that should be a Main Factor. Under the draft proposed regulations governmental purpose is Other Factor H.
   2. The current version of the draft proposed regulations focuses on control in both the Main and the Other Factors. With regard to non-profit entities, our experience is that the control comes from the contract or the charter between the non-profit entity and the state or political subdivision. Contrary to what the draft proposed regulations currently provide, we believe that the final regulations should recognize that a contract or a charter can be the equivalent of the control that is described in the current version. Therefore, we would ask that the Main Factors A and B and Other Factor A be modified to recognize this broadened definition of control. Our clients do not take the position that any contract is sufficient to meet the control requirement, but that certain contracts should be sufficient.
   3. The current draft proposed regulations (Main Factor D) ask whether employees of the non-profit entity are treated as public employees for purposes other than employee benefits. In states or political subdivisions where there is no civil service system, being treated as a public employee may boil down to eligibility for employee benefits. Therefore, we would suggest that that question be refined to ask whether the employees of the non-profit are treated as public employees for purposes other than the governmental retirement plan.
   4. In Main Factor E, the Service has quite appropriately focused on sovereign powers and the delegation of sovereign powers. Education and the health and welfare of children, the disabled, and senior citizens are paramount governmental purposes. It would seem that entities that perform these functions on behalf of state or local government should be viewed in the same light as entities that have been delegated taxing or police powers. Therefore, we would ask that the Main Factor on delegation of sovereign powers be broadened and perhaps combined with the Other Factor on governmental purpose. We believe that this approach would recognize the modern realities of state and local government and the role that non-profit entities play in providing governmental services.
   5. We would recommend that a change be made to the funding factor (Other Factor B). If a non-profit entity is primarily funded by tax dollars via a contract or charter, we believe that factor should weigh in favor of governmental status. The draft proposed regulations imply that funding via contract or charter is not enough. We believe that is an area for substantial revision. Again, we are not saying that public funding via contract on charter should be an automatic "passing" factor – but neither should it be an automatic "fail."
   6. The current version of the draft proposed regulations leaves the impression that a non-profit entity that is established under a general statutory provision as opposed to a specific statute will have a "failing mark" in the "Other Factor" category. (This is Other Factor C.) Instead we would ask the Service to make it clear that this is not the case. Having a "special" incorporation statute may provide a clear legislative determination that an entity is performing a governmental function. But the absence of such a statute should not be viewed as a legislative determination that an entity is not performing a governmental function.
3. We also want to raise with you an issue that we do not believe is addressed in the draft proposed regulations – the issue of affiliated non-profit entities. Treas. Reg. §1.414(c)-5(b) provides that, if a 501 entity's employees participate in a plan, then the employer with respect to the plan includes "any other organization that is under common control with that exempt organization." This is required aggregation. Permissive aggregation is described in Treas. Reg. §1.414(c)-5(c), which allows aggregation of non-profit entities that regularly coordinate their day-to-day exempt activities. In each case (required and permissive aggregation), governmental plans would need guidance as to whether the decision to categorize a non-profit entity as a governmental entity would mean that all aggregated entities would also be required to be treated as governmental entities for purposes of plan participation or whether they could permissively be treated as governmental entities.

In closing, I would like to reiterate what are probably the most consistent requests from our clients:

1. Please open a ruling program as soon as possible after the regulatory process.
2. If the final regulations are not modified as suggested above to allow flexibility in the participation of non-profit entities in governmental plans, then the final regulations should provide grandfathering for non-profit entities that participate in a governmental plan as of the effective date of the final regulations if those entities were participating in the governmental plan pursuant to state or local law and the terms of the plan document.

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1. On May 3, 2012, the Internal Revenue Service conducted the second of two scheduled town hall meetings to allow public testimony and Q&A with regard to the Advanced Notice of Proposed Rulemaking (ANPRM) that was issued November 8, 2011 regarding the definition of governmental plans under IRC Section 414(d). Reg. 157714-06, 76 Fed. Reg. 69172, https://federalregister.gov/a/2011-28853. At this town hall meeting, held in Cleveland, OH, Terry Mumford presented these remarks. Presenters were limited to 8 minutes each, so Terry focused her remarks on client concerns regarding non-profit entities. Ice Miller will be filing more detailed, complete comments prior to the deadline for comments – June 18, 2012.
  
2. This advisory opinion, issued by the Department of Labor's Employee Benefits Security Administration on April 27, 2012, found that participation by private, nonprofit employers in Connecticut's state group health plan would adversely affect its status as a governmental plan under ERISA Section 3(32).

3. Pamela Kinard, Senior Technician Reviewer, Qualified Plans Branch 2, Office of Division Counsel/Associate Chief Counsel (Tax-Exempt and Governmental Entities).

Some studies suggest that the answer is  yes!  In a recent study, the Preqin Research Report Private Equity Investor Survey August 2009, many limited partners (LPs) investing in private equity funds reported that the balance of power in negotiations between the funds general partners (GPs) and the LP's had shifted in favor of the LPs.  In fact, according to the Preqin report, in April 2009, 27 percent of investors thought they had greater negotiating power.  Three months later, in July 2009, 55 percent of investors interviewed by Preqin believed they had greater negotiating power.

Why would that be?  Certainly, one of the reasons is that levels of LP investment have fallen significantly from previous years.  According to the Preqin report, private equity funds raised $194.5 billion in the first quarter of 2008, while they raised only $64 billion in the first quarter of 2009.  The GPs have to compete for the limited LP funds that are actually being invested now.  One of the ways to do that is to offer LPs more favorable terms.

So, cash-rich LPs appear to be returning to the market.  Private equity fundraising has already begun to improve in 2009.  According to the Preqin report, $79.7 billion was raised by private equity funds in the second quarter of 2009 as compared to $64 billion in the first quarter of 2009.

When you are choosing an entity there are a number factors you should consider.  For instance, you should think of how you would like to manage the business, protection against liability and your preferred tax treatment.  Below are brief descriptions of several business entities that may suit your needs and some of the advantages and disadvantages of choosing those entities.

Sole Proprietorship
The sole proprietorship is the simplest form of business.  A sole proprietorship is not an entity separate from you.  Though the sole proprietorship is a simple and convenient way to operate your business, you should beware, you will be exposed to unlimited personal liability if you operate your business as a sole proprietorship.  The owner of a sole proprietorship is directly and personally liable to creditors and other claimants. 

Corporate Entities

Corporation
A corporation is a business entity created under state law and is as an independent legal "person" apart from its shareholders and directors. A corporation's shareholders are generally not liable for the obligations of the corporation and are thus generally shielded from the corporation's creditors even if the corporation cannot pay its obligations.  Corporations must comply with statutory rules which are typically more restrictive and require considerably more formality than limited liability companies.

C Corporation
The distinction between a C Corporation and an S Corporation relates to the corporation's tax treatment.  Some of the advantages of a C Corporation are that ordinarily you may deduct the entire value of the fringe benefits offered to shareholders who also serve as employees, the number of shareholders the entity may have is unlimited and they may be either individuals, entities, U.S. residents or foreign.  C Corporations also have significant flexibility to carry corporate losses forward to future tax years.  But, operating as a C Corporation usually subjects you to double taxation, i.e., tax at two levels.  First, the net earnings of the corporation are taxed, and then, the shareholders will be taxed on the earnings of the corporation distributed to the shareholders.  For example, if a corporation issues dividends to its shareholders, it has already paid income tax on that money, but the dividends remain taxable as income to each shareholder. 

S Corporation
An S corporation is a regular corporation that has elected "S corporation" tax status. An S Corporation provides the limited liability of a corporation and the tax treatment of a partnership or a limited liability company.  With respect to non-tax considerations, the S corporation is essentially identical to a C Corporation.  The significant tax advantage with the S Corporation is that the corporation does not pay any income tax on its earnings.  Some disadvantages to an S Corporation are that only once class of stock is permitted and you must limit the shareholders to 100 individuals, none of which may be an entity (with the exception of estates and certain types of trusts) and none of which may be non-resident aliens.

Unincorporated Entities - Limited Liability Company
The limited liability company (LLC) has characteristics of both a corporation and a partnership. The primary characteristic an LLC shares with a corporation is limited liability, and the primary characteristic it shares with a partnership is the availability of "pass-through" income taxation.  Unlike a corporation, few of the LLC statutory rules are mandatory and most of its governance is dictated by an operating agreement executed by its members  The management powers in the LLC can be retained by the members of the LLC or centralized within a board of managers (who may or may not be members).  Another advantage of the LLC is that its flexibility allows for much less administrative paperwork and record keeping than a corporate structure.  Some disadvantages of an LLC are that some investors are more comfortable with a corporate structure (although this may only be an issue once the company is ready to take on significant investors and not in the early stages of your business) and some creditors may require that you, and other members, personally guarantee a loan to your LLC. 

Partnerships

General Partnership
In a general partnership, each partner has full and equal control over the partnership.  The partnership is a "pass through" entity for tax purposes.  While partners have considerable flexibility in structuring their relationship, partners run a great risk of loss because there is no limitation to a partner's liability.  Partners have joint and several liability for the acts of each partner within the scope of partnership business. 

Limited Partnership
Under a limited partnership (LP), unlike a general partnership, the limited partners are not responsible for partnership debts, obligations and liabilities.  An LP may have an unlimited number of limited partners, but must have at least one general partner who is responsible for the management of the partnership.  The general partner remains personally liable for partnership debts, obligations and liabilities, but the general partner can be a limited liability entity to add a layer of protection to the individuals managing it.  Like the general partnership, the LP is treated as a "pass-through" entity.  A disadvantage of the LP is that the limited partners must be careful not to become engaged in the decision making of the business or they will run the risk of losing limited liability protection. 

Limited Liability Partnership
A limited liability partnership (LLP) is a variation of the LP which allows a limitation of liability without the restriction on active participation required with an LP.  Under an LLP, partners remain liable for their own acts and are generally not liable for the acts of others, unless the partner has acted negligently or committed misconduct.  As with the general partnership and the LP, an LLP is treated as a "pass-through" entity for tax purposes.

Bottom Line:  There is no "one size fits all" answer to the choice of entity question.  You should give careful consideration to your needs and the needs of your business before settling on an entity.  Since the factors in consideration may be significant and the tax analysis complex, it may be wise to consult your tax advisor or an attorney to assist you in the decision process. 

The following blog was posted by Kristine Danz, a partner at Ice Miller LLP.

We can now officially relegate 2008 to the records books.  Wall Street took a beating unlike anything we've seen since the 1930s, we witnessed a historical presidential election and a bailout of an unfathomable magnitude.  Main Street felt the pinch as well with unemployment on the rise.  So what awaits us in 2009?

By all accounts, we're looking at a rough first quarter.  According to a survey by the National Venture Capital Association (NCVA), U.S. venture capitalists are forecasting a difficult 2009 for, "the country's economy, the capital markets, and the venture industry as the global financial crisis takes its toll on the entrepreneurial system." Other highlights, or rather lowlights include:

• Continued slowdown in the number of IPOs;
• Limited investments in seed and early stage investments;
• Difficulty in securing funding for newer companies;
• Declining returns for VCs.

And now for the good news.  Investments in clean technology, life sciences and biotechnology are expected to grow and debt markets will likely improve.

Like they say in the news business, we don't make the news, we just report it.

The following blog was posted by Jennifer Rhodes, a partner at Ice Miller LLP.

In our fourth in a series of life science distinguished speakers luncheons we were privileged to have Dr. Eric Meslin Ph.D., Director IU Center for Bioethics, Associate Dean (Bioethics), IU School of Medicine, Professor of Medicine, Medical and Molecular Genetics, and Philosophy.  The topic was “What In The World does Ethics Have To Do With Health Research.”  Dr. Meslin’s point was not just to talk about the world but the people who are working in it, on it, for it and with it.

Dr. Meslin started out by telling the group that there is much more research going on in the world involving a collaboration of researchers from different countries and cultures, but the problem then becomes, who is reviewing the research and what ethical guidelines apply.  There is also a lot more money than ever before.  Studies show that between 1998 and 2003, global expenditures on health research have quadrupled, to about $125 billion.  By 2000, 70% of all clinical trials were funded by the private sector.  It's not simply the federal government or the pharmaceutical industry, but there are also public and private players, including large philanthropic players.

And yet the shift in the epidemiology of diseases is happening in economically developing countries just like it's happening here.  People who live in developing countries are not just dying of malaria, TB or HIV.  They die of heart disease, cancer and diabetes just as people in developed countries such as the U.S. do.  He pointed out that drugs are still too expensive, despite the efforts of many in the healthcare industry that donate drugs and have humanitarian aid programs.  And still, the Global Forum on Health Research coined the phrase the “10/90 Gap” which means that of all of the dollars spent on research in the world only 10% is going to diseases that affect 90% of the world's population.

This begs the question which was Dr. Meslin’s topic of discussion, what in the world does ethics have to do with health research?  And the answer is: all studies involving human subjects must receive prior science and ethics review.  He went on to state that despite the increased investment in research and development and international philanthropy, there is still a demonstrable inequity in access to benefits of research.  Which led to his next big question, are there universal ethical principles that apply irrespective of country or culture?  Bioethics has been working on this question for quite some time.  There are 17 articles in the universal declaration on bioethics and human rights.  But what do you do when they conflict?  Which one takes precedence over the other?  And what is really meant by each of them?

Collaborative research not exclusively, but especially between economically developed and developing countries requires some common set of ethics guidelines or procedures.  Not feeling that there was a single set of ethical principles, Dr. Meslin and his international colleagues have written a memorandum of understanding that is the first of its kind to describe the common principles that will be followed in their research and guide those relationships and activities.  The guidelines address the following issues: Who may be asked for informed consent?  What procedures will be in place to prevent exploitation?  When is it acceptable to use a placebo?  Where else is it acceptable to conduct studies that can feasibly be carried out in one’s home country?  Why is research conducted on some groups and not others? And how should any benefits be distributed?

Despite the significance of the guidelines, Dr. Meslin emphasized that there was still work to be done in order to make this document live and work.  Simply stated, they had to figure out what its limitations were, and this is what they realized, not only do cultural differences have a real impact on how people think about ethical issues in different countries, but economically developing countries are not necessarily ethically developing countries. He made the point that we should not be thinking that just because a country's GDP is lower than ours, that the people who are in that country are any less concerned about ethics, are any less concerned about how to carry out ethically relevant research and ethically consistent research.  The question of ethics in healthcare research is an ongoing one and will always be.