In general. The private equity fund credit is based on the MBT liability of the private equity fund attributable to the fund's activities as an eligible taxpayer for the tax year - after claiming any other credit allowed under the MBT - apportioned to Michigan based on the activity and location of the private equity fund manager.

Who is the taxpayer? The private equity fund, defined as a pooled investment vehicle that is or holds itself out as being engaged primarily in the business of investing in private equity. Private equity funds are generally organized as limited partnerships. Private equity funds are exempt from registration as an investment company under the Investment Company Act of 1940. See 15 USC 80a-1, et seq.

What is an eligible taxpayer? "Eligible taxpayer" means "a taxpayer that is a private equity fund which serves as a conduit for the investment of private securities not listed on a public exchange by accredited investors or qualified purchasers at any time during which the investment is acquired or subsequently used to claim the credit under this section." MCL 208.1453. In other words, an eligible taxpayer is a private equity fund that serves as a conduit for the investment of private securities by accredited investors or qualified purchasers. The private securities must not be listed on a public exchange. To qualify as an eligible taxpayer, all of the above criteria must be met at the time the investment is acquired and sold. To the extent that a private equity fund conducts activity that does not satisfy the eligible taxpayer criteria, the tax liability attributable to such activity shall not qualify for the credit. Whether or not an investor or purchaser qualifies as an accredited investor of qualified purchasers is a matter of federal law. For example, whether a person that acquires an investment from a qualified purchaser by gift or bequest is resolved under 15 USC 80a-3(c)(7)(A).

How is the credit apportioned? The credit is apportioned to Michigan "by a fraction, the numerator of which is the total activity of the private equity fund manager conducted in this state during the tax year and the denominator of which is the total activity of the private equity fund manager conducted everywhere during the tax year." MCL 208.1453. The "total activity of the private equity fund manager" is measured by the receipts of the private equity fund acting as an "eligible taxpayer," and includes the sale of investment assets and investment related receipts. "[T]he location of the activity of the private equity fund manager is based on the location of the office from which the fund manager conducts management activity for the eligible taxpayer." MCL 208.1453. Thus, the apportionment formula is the receipts of the private equity fund derived from investments managed by the fund manager from offices in Michigan over receipts derived from investments managed by the fund manager everywhere. For example, a private equity fund purchased a 40% share in a private research company in 2008. The fund manager manages that investment from an office in Michigan. The private equity fund sells its stake in the research company in 2009 resulting in receipts of $200,000. For the 2009 tax year, the numerator will include that $200,000.

Note that the credit and apportionment is limited to the eligible taxpayer; the credit of an eligible taxpayer is not apportioned based on the activities a manager renders to all of its eligible taxpayers.

What does the term "securities" mean? The term "securities" is not generally defined under the MBT. For purposes of the private equity fund credit, the IRC does not define "securities" in any comparable context. However, the private equity fund credit relies on other definitions found in the Securities Act of 1933 and the Investment Company Act of 1940. Furthermore, private equity funds are generally governed under the provisions of federal security laws. Thus, the Department concludes that the definition of securities as found in the Securities Act of 1933 shall control for purposes of MCL 208.1453. In other words, for purposes of the private equity fund credit, "security" means:

any note, stock, treasury stock, security future, bond, debenture, evidence of indebtedness, certificate of interest or participation in any profit-sharing agreement, collateral-trust certificate, preorganization certificate or subscription, transferable share, investment contract, voting-trust certificate, certificate of deposit for a security, fractional undivided interest in oil, gas, or other mineral rights, any put, call, straddle, option, or privilege on any security, certificate of deposit, or group or index of securities (including any interest therein or based on the value thereof), or any put, call, straddle, option, or privilege entered into on a national securities exchange relating to foreign currency, or, in general, any interest or instrument commonly known as a "security", or any certificate of interest or participation in, temporary or interim certificate for, receipt for, guarantee of, or warrant or right to subscribe to or purchase, any of the foregoing. [15 USC 77b.]