Loans Aren't Securities

On May 22, in Kirschner v. JPMorgan Chase Bank, N.A., the SDNY applied the “family resemblance test” articulated by the Supreme Court in Reves v. Ernst & Young to conclude that syndicated loans were not securities for securities law purposes. (For a detailed discussion, see our Clients & Friends memo.) This decision helps shed light on the tax law applicable to foreigners that invest in primary market debt.

The IRS asserts that regularly making loans to the public (either directly or through an agent or partnership) is a U.S. trade or business that can subject a foreigner to U.S. tax. By contrast, the tax code provides that purchasing and selling “securities” on the secondary market is not a U.S. trade or business (the securities trading safe harbor), and the tax regulations define securities to include any “evidence of indebtedness.”