Minimizing IRS Scrutiny of Private Equity Management Fee Waivers: Structuring Defensible Waiver Agreements

Recording of a 90-minute CLE/CPE webinar with Q&A


Conducted on Tuesday, December 12, 2017

Recorded event now available

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Program Materials

This CLE/CPE webinar will explore designs for private equity management fee waivers in light of the latest developments in the law, industry practice and potential tax reform legislation. The panel will discuss critical terms for agreements to minimize the risk of IRS challenge to new arrangements and offer guidance in light of recent IRS audit activity of existing fee waiver arrangements.

Description

The IRS proposed regulations in 2015 to address potential abuses in the practice, and the IRS has conducted a series of audits focusing on fee waiver arrangements. It is unclear if or when the regulations will be finalized, but current tax reform proposals would affect many current and future fee waiver arrangements.

The proposed regulations apply a facts-and-circumstances test to determine whether a fee waiver arrangement should be treated as payment for services. The critical factor is whether the waiver lacks “significant entrepreneurial risk,” and the proposed regulations list a number of factors relevant to whether a fee waiver arrangement should be recharacterized as ordinary income.

Tax counsel to private equity funds should consider whether existing fee waiver arrangements are likely to be challenged on audit, which may lead to reclassification of profits interest as ordinary income. The implications of tax reform should also be considered.

Listen as our experienced panel provides practical guidance on the IRS’ position on management fee waivers, including best practices for structuring waivers that maximize the chance of withstanding IRS scrutiny.

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Outline

  1. Common management fee waiver structures
  2. Overview of the proposed regulations
    1. Entrepreneurial risk
    2. Other factors including gross vs. net income allocations, capped allocations and hard-wired arrangements
  3. 2017 audit activity focused on fee waiver arrangements
  4. Potential effects of reclassification (application of Section 409A or 4547A to disguised fees)
  5. Strategies for revising fee waiver arrangements
  6. Implications of tax reform

Benefits

The panel will review these and other key issues:

  • How are management fee waivers typically structured and what are the tax risks inherent in these structures?
  • What conditions on the general partner’s receipt of the special allocation could make the arrangement more defensible and how does the timing of the election impact the risks?
  • What are the key factors identified by the proposed regulations for analyzing whether a fee waiver arrangement will withstand IRS scrutiny?
  • How would tax reform affect fee waiver arrangements?

Faculty

Butler, Stephen
Stephen Butler

Partner
Kirkland & Ellis

Mr. Butler's practice focuses on the tax aspects of complex business transactions and reorganizations, with a...  |  Read More

Meehan, Daniel
Daniel P. Meehan

Partner
Kirkland & Ellis

Mr. Meehan is a tax partner in the Chicago office of Kirkland & Ellis LLP. His practice focuses on the tax...  |  Read More

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