Archive - July 2015
Proposed Regulation 1.707-2 makes the future of “fee waivers” dim!
The topic of “fee waivers” has been covered several times by fund-taxation.com. A "fee waiver" is a technique often used in the private equity fund context whereby the fund manager waives all or portion of its 2% fee in exchange for a profit interest or an offset against the GP’s capital commitment. A lot has been written on this topic by various authors debating the tax issues associated with the strategy. As many practitioners who follow the industry know, the IRS has been studying “fee waivers” for the last few years. Moreover, the IRS had...
July 24, 2015 read more
Notice 2015-47 makes “basket options” a listed transaction
The IRS has decided to lay the hammer on “basket option” strategies utilized by some hedge funds to convert short term capital gain and ordinary income into long term capital gain. The strategy became notorious after an investigation by the U.S. Senate Permanent Subcommittee on Investigations into Renaissance's operations (original story could be found here). In the strategy, a hedge fund will enter into a contract with a third party, for example a bank, to receive a return based on the performance of a notional basket of referenced actively traded securities. The...
July 10, 2015 read more
“Investor Control” doctrine shuts down investment manager’s private placement insurance planning
Webber v. Comm’r, 144 T.C. No. 17 (2015) is an approximately 100 page Tax Court opinion that tells the tale of a sophisticated private placement insurance planning gone wrong. It is a tale of a well-structured planning with various controls and policies foot falling on the facts. Private placement variable life insurance is a tax planning tool used by many high-net worth individuals, including hedge fund and private equity managers. Typically the manager would pay a premium upfront and fund the insurance in segregated account through which it would acquire various speculative...
July 01, 2015 read more