This memorandum is intended to alert you that a U.S. person who had a financial interest or signature authority over a foreign financial account during the 2008 calendar year is required to disclose the existence of such account to the U.S. Treasury Department by June 30, 2009. This requirement often applies to private investment funds and/or their principals or employees.

There have been recent changes to the rules that are applicable beginning with filings due on June 30, 2009. Specifically, the types of persons and accounts subject to reporting have been expanded.

A “U.S. person” is required to file Form TD F 90-22.1 to report the existence of an offshore “financial account” where such person either (1) had “signature authority” over such account, or (2) had a “financial interest” in such account at any time during the 2008 calendar year.

The filing requirement only applies to a U.S. person if the aggregate value of all such accounts in which a person had a “financial interest” or “signature authority” exceeded $10,000 at some time during the 2008 calendar year. The deadline for filing Form TD F 90-22.1 for 2008 is June 30, 2009. Extensions are not available.

“U.S. Person”

A “U.S. person” means “a citizen or resident of the United States or a person in and doing business in the United States” including “an individual, a corporation, a partnership, a trust or estate, a joint stock company, an association, a syndicate, joint venture or other unincorporated organization or group, an Indian Tribe…and all entities cognizable as legal personalities.”

A person is “in and doing business in the United States” if that person is conducting business within the United States on a regular and continuous basis. In general, any person who is engaged in a trade or business in the United States for U.S. federal income tax purposes should file Form TD F 90-22.1 for each foreign account. This would include, for example, a foreign private investment fund that is engaged in a U.S. trade or business as a result of engaging in loan origination activity or investing in U.S. real estate assets.

“Financial Account”

A “financial account” includes “any bank, securities, securities derivatives or other financial instruments accounts.” Such accounts include any accounts in which the assets of the account are held in a “commingled fund” in which the account holder holds an equity interest. Under revised instructions effective for filings due on June 30, 2009, a “commingled fund” specifically includes a “mutual fund.” In informal guidance, the U.S. Treasury Department has taken the position that a hedge fund or private equity fund will be treated as a “commingled fund.”

As a result, every U.S. person who invests in a mutual fund, hedge fund or private equity fund organized outside the United States is required to report such investment on Form TD F 90-22.1. In addition, a domestic feeder fund which owns an interest in an offshore master fund will also be required to report its investment in the master fund on Form TD F 90-22.1.

“Financial Interest”

A person will be treated as having a “financial interest” in an account if either:

• He is the owner of record or has legal title to the account, regardless of whether the account is maintained for his own benefit or the benefit of others; or
• He is not the owner of record or legal title but the owner of record or person having legal title is either:
  • acting on his behalf (e.g., as an agent nominee or attorney);
  • a corporation in which he owns directly or indirectly more than 50 percent of the value of the stock;
  • a partnership in which he owns more than 50 percent of the profits; or
  • a trust in which he either has a present beneficial interest in more than 50 percent of the assets or from which he receives more than 50 percent of the current income.

“Signature Authority” or “Other Authority”

A person has “signature authority” over an account if such person can either control the disposition of money or other property in the account (1) by delivering a document containing his signature to the bank or other person with whom the account is maintained, or (2) by delivering a document containing his signature and that of one or more other persons to the bank or other person with whom the account is maintained.

A person has “other authority” over an account if the person can exercise power comparable to “signature authority” over an account by direct communication to the bank or other person with whom the account is maintained, either orally or by some other means.

Examples Applicable to Private Investment Funds

A Form TD F 90-22.1 is required to be filed in the following cases. In each of the examples, it is assumed that the balance of the account at issue is in excess of $10,000:

1. An investment fund organized as a Delaware limited partnership has an offshore bank or brokerage account. Reporting is required by the fund.
2. A principal or employee of an investment manager has signature authority over an offshore bank or brokerage account maintained by an investment fund (whether the fund is domestic or offshore). Reporting is required by each principal or employee with such authority. This is the case even where more than one signature is required to disburse funds from the account. Although the rules are not entirely clear as to whether reporting would also be required by the investment manager in this circumstance, because of the potential penalties involved for nonfiling, a conservative approach would be to have the investment manager report its signature authority over the offshore account as well.
3. A domestic feeder fund owns more than 50 percent of an offshore master fund and the master fund has an offshore bank or brokerage account. Reporting is required by the domestic feeder fund with respect to the offshore bank or brokerage account. In addition, the domestic feeder is required to report its equity interest in the master fund as a “financial account.”
4. A U.S. tax-exempt entity invests in an offshore fund. The U.S. tax-exempt entity is required to report the investment in the offshore fund as a “financial account.”

A Form TD F 90-22.1 is not required to be filed in the following circumstances:

1. A principal or an employee of an investment manager has the authority to direct an offshore administrator to disburse funds from an account, provided that account is at an institution other than the administrator (e.g., a third party bank or brokerage).
2. An investment fund has a domestic bank or brokerage account. The fund does not have to report. A person with signature authority over such account does not have to report.
3. An offshore feeder fund owns more than 50 percent of a master fund and the master fund has an offshore bank or brokerage account. The offshore feeder fund does not have to report, unless it is “in and doing business in the United States.”¹
4. An offshore fund (feeder, master or stand alone) has an offshore bank account. The fund does not have to report.²

Civil and Criminal Penalties for Failure to File

The penalties for failing to file Form TD F 90-22.1 were substantially increased in 2004 and the Internal Revenue Service has recently increased its enforcement efforts regarding these filings. The penalty for an unintentional failure to file Form TD F 90-22.1 is $10,000. This penalty could apply even where a person did not know about the filing requirement.

The penalty for an intentional failure to file Form TD F 90-22.1 is the greater of $100,000 or 50 percent of the value of the account. In addition, a person who intentionally fails to file Form TD F 90-22.1 may be subject to criminal prosecution.

Form 1040 Reporting Requirement

In addition to the filing requirements discussed above, a taxpayer with an interest in, or signature or other authority over, a financial account in a foreign country must disclose such account on Line 7(a) of Schedule B of his Form 1040 and disclose the name of the foreign countries in which the accounts are located on Line 7(b). Schedule B refers a taxpayer to Form TD F 90-22.1 to determine whether or not he has such an account.

If you have any questions regarding reporting of such foreign financial accounts or need assistance completing Form TD F 90-22.1, please call Jim Cofer at (212) 574-1688.

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¹ A U.S. person with signature authority over such account would be required to report the account.

² A U.S. person with signature authority over such account would be required to report the account.