On September 22, 2009, the Internal Revenue Service (IRS) Office of Chief Counsel issued a memorandum concluding that “interest income received by a foreign corporation with respect to loans that it originated to U.S. borrowers constitutes income effectively connected” with the conduct of a U.S. trade or business and is subject to net income tax in the U.S.  Some hedge fund managers – especially those with funds focused on credit or lending – are concerned that the memo presages more focused attention by the IRS on investments by offshore hedge funds in U.S.-based debt.  Other managers think the memo’s effect on hedge funds may be limited because it addresses a narrow fact pattern that differs in important ways from the typical approach taken by offshore funds to investments in U.S. debt.  However, even those that distinguish the memo on its facts concede that, at a broader level, the memo may indicate a disposition on the part of the IRS to take a harder look at lending activities by offshore entities in general.  The concern here is that even if this memo does not capture typical hedge fund investments within its purview, another memo that does may be in the offing.  This article details the fact pattern and legal conclusions of the memo, then analyzes the potential implications of the memo for offshore hedge funds.  In particular, the article explores: the extent to which the fact pattern in the memo resembles and departs from the typical structure of investments by offshore hedge funds in U.S. debt; efforts by offshore funds to structure debt investments to fit within the securities trading safe harbor; the components of lending activities that typically are and are not carried on by offshore hedge funds; secondary market purchases of U.S. debt by offshore hedge funds; whether the memo applies with greater or lesser force to the purchase by offshore hedge funds of loan portfolios; the leveling effect of the memo on the difference between independent and dependent agents; the effect of the memo on the tax concept of an “office” in the U.S.; and how the memo has already and is likely to, going forward, affect the structuring of offshore hedge funds.