Archive - April 2012
Beware of the PTP Rules: Who Ends up Liable if a Secondary Transfer Triggers Section 7704?
Private equity funds often have lock up periods that prevent limited partners from transferring their interest. However, these periods eventually expire and limited partners who want to exit the fund early have the option of disposing their interest on the secondary market. This option is often conditioned on providing a legal opinion of counsel or an LP certification that the transfer would not cause the fund to be treated as a “publicly traded partnership” under Section 7704 of the Code. If the fund is treated as a “publicly traded partnership” there could be negative tax...
April 30, 2012 read more
Hearing Date on the Section 871(m) Proposed Regulations Approaches
For those who have not followed this closely, section 871(m) was enacted with the 2010 HIRE Act and shut down certain dividend equivalent strategies that utilized swaps in order to circumvent the U.S.withholding rules on dividends. Early this year the IRS issued proposed regulations that address the application of Section 871(m). The proposed regulations on dividend equivalent payments have been in circulation for several months now and practitioners have had enough time to ruminate on their impact on the investment fund industry. Recently, in the advent of the April 27 proposed...
April 25, 2012 read more
The Section 1411 Net Investment Tax is Around the Corner
Section 1411, which was enacted with the Health Care and Education Reconciliation Act of 2010, will impose a 3.8% tax on net investment income earned by individuals. The tax is designed to mimic the SECA tax imposed on self-employed service providers. One group of taxpayers who will be affected by the tax includes fund managers and investors in private equity and hedge funds. The tax is scheduled to come into effect at the end of this year. What prompted me to write about this tax was a recent news bit by Shamik Trivedi of TNT who reported that the Government will release proposed Section...
April 17, 2012 read more
An agreement between a NOL target and a group of investment funds triggers the Section 382 five-percent shareholder rule
Section 382 generally limits the availability of NOLs for post-acquisition periods if there is a 5% shareholder ownership change in the target company. This provision is particularly important to both vulture investment funds and the target bankrupt companies the funds are acquiring. NOLs are often priced in the deal and the parties to the acquisition go to great lengths to make sure that the Section 382 rule is not triggered by the fund’s investment. If the rule is triggered, the utility of the NOLs is lost and the fund’s future cash flows are less than anticipated.In...
April 17, 2012 read more