The Taxpayer Relief Act of 1997 eliminated the foreign principal office provision effective for taxable years beginning after December 31, 1997. The repeal allowed offshore funds to be administered from the US if this is desired, although there are several other tax and non-tax issues to consider before bringing certain functions onshore. State tax and federal, state and foreign laws, however, continue to impact the movement of operations to an onshore location, as discussed in more detail below.

Under the legislation, a fund's US administrative and other activities, which were previously required to be performed offshore to comply with the "Ten Commandments" (Section 864), generally will not create tax nexus for US Federal income tax purposes. However, depending on the laws of the particular jurisdiction in which its US activities are conducted, those same US activities may under some circumstances create tax nexus in certain state or local jurisdictions. Some states (e.g., Massachusetts, New York, California) have either amended their statutes or issued interpretive releases to address the new federal provisions. However, all states may not have conformed to the new federal law, or may not have done so completely, and careful consideration still has to be given to the potential state and local tax consequences of onshore activities before any activities that are currently conducted outside the US are brought onshore. Additionally, investors may perceive that certain functions, particularly involving shareholder servicing and communication, when performed onshore may subject investor records to US regulatory or judicial scrutiny, diminishing sought-after confidentiality. While this perception may or may not be accurate, offshore fund management may need to account for this in any decision to move administrative activities onshore.

While we no longer need specific management representation as to its belief that the fund meets the "Ten Commandments," we should continue to request representation, particularly if any operations are moved onshore, that management believes the fund is not subject to US Federal and state taxation, particularly if, consistent with ASC 740, nexus matters are identified which are subject to significant interpretation. Refer to the US Template Manager database for the most current versions of management representation letters.