Tax Challenges With Private Equity Management Fee Waivers Given Newly Heightened IRS Scrutiny

Structuring Waiver Arrangements in Light of the Proposed Regulations and Possible Changes to Profits Interest Rules

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

Conducted on Tuesday, October 13, 2015

Recorded event now available

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Course Materials

This CLE/CPE course will provide tax counsel with a review of private equity management fee waivers in light of the recently issued proposed regulations, the issues practitioners should consider when advising on fee waivers, the tax risks involved, and best practices for structuring waivers that maximize the chance of withstanding IRS scrutiny.

Description

On July 22, 2015, the IRS proposed regulations to address what it perceives as abuses in the practice of “management fee waivers” by private investment fund managers. Given the uncertainty created by the proposed regulations and possible changes to the rules on profits interests, practitioners representing such fund managers must consider several competing concerns when advising clients about waiver arrangements.

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

The preamble to the proposed regulations also indicates that changes will be made to exclude some or all profits interests associated with fee waiver arrangements from the existing “safe harbor” under IRS Revenue Procedures 93-27 and 2001-43. If the regulations are finalized as proposed, and if the suggested changes to the profits interest rules are implemented, many fund managers will likely need to modify future fee waiver practices to avoid undesirable tax results.

Listen as our authoritative panel of attorneys outlines the various ways fee waivers can be structured, the tax risks involved and best practices for structuring waivers that maximize the chance of withstanding IRS scrutiny.

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Outline

  1. Drafting and revising fee waiver structures
  2. Areas the IRS identifies in proposed regulations as problematic and potential for income reclassification
  3. Potential effects of reclassification (application of Section 409A or 4547A to disguised fees)
  4. Audit risks for existing fee waiver arrangements

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 could make a waiver arrangement more defensible and how does the manner of the waiver 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 do the proposed regulations interact with other federal income tax rules?

Faculty

Larvick, Matthew
Matthew P. Larvick
Shareholder
Vedder Price

Mr. Larvick is a Shareholder in the firm’s Corporate Practice Area, specifically corporate taxation. His practice...  |  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

Peter J. Withoff
Peter J. Withoff
Partner
Faegre Baker Daniels

Mr. Withoff is a partner in the Tax Group, focusing primarily on federal income tax matters. He has dealt with a wide...  |  Read More

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