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Tax News
Proposed Partnership Audit Regulations are Out
Proposed Partnership Audit Regulations are Out
In a 270 page blockbuster release, the IRS laid down the law on the new partnership audit tax regime in proposed reg project REG-136118-15. As a background, Congress repealed TEFRA and replaced it with the Bipartisan Budget Act of 2015 (BBA). The BBA was enacted in a rush and was later followed by the Tax Technical Corrections Act of 2016 (H.R. 6439, S. 3506) which never passed. The main highlight of the new rules is that partnerships could end up liable for the assessed tax as compared to the TEFRA rules where the tax liability passed to the individual partners.  One of the key...
January 19, 2017 read more
Revived focus on monitoring fees
Revived focus on monitoring fees
This issue had died out for a while since the 2014 articles by Gregg Polsky and the NYT but is now back in full force. The Center for Economic and Policy Research (for short CEPR) just released a populist paper titled “Fees, Fees and More Fees: How Private Equity Abuses Its Limited Partners and U.S. Taxpayers.” In addition, Americans for Financial Reform addressed a similar letter to Jack Lew and John Koskinen. The spirit of these reports is basically a rehash of Mr. Polsky’s 2014 arguments. The gist of it is, bad private equity is abusing the law and hurting hard working...
May 13, 2016 read more
Temporary Regs Shut Down Partner-Employee Planning
Temporary Regs Shut Down Partner-Employee Planning
In the investment fund and private M&A world it is very common to issue profits interest to key-men. In the investment fund context these could be top traders for example who share in the GP’s carry. In the private M&A context these would be non-founding member executive talent. Often these individuals would be perceived by the founders and other parties as employees but would be remunerated like partners. In fact, many times, individuals who were previously purely treated as employees are converted to profit interest members. That usually presents a predicament from a tax...
May 04, 2016 read more
FAA 20161101F – A tax equity deal gone wrong
FAA 20161101F – A tax equity deal gone wrong
For readers that do not specialize in this area, tax equity transactions are prevalent in the energy sector and other sectors that offer tax credits or other incentives to stimulate particular activities (for example, historic rehabilitation in the case of Historic Boardwalk).  The main parties to the transaction are the tax equity investor and the developer of the project. Typically the deal will be structured as a partnership flip whereby the investor receives 99% of the tax benefits until a flip point (based on IRR or fixed date) and a 5% of profit/loss thereafter. One of the key...
March 18, 2016 read more
Fee Waiver Hearing Set for February 26th
Fee Waiver Hearing Set for February 26th
The IRS just announced in Federal Register Vol. 81, No. 17 that it will hold a hearing on February 26th about the disguised payment for services proposed regulations under Section 707(a)(2)(A) (REG–115452–14).  The proposed regulations were issued in July last year and our original coverage can be found here.  Arguably, if the proposed regulations are adopted in their current form, they will put a significant dent into the fee waiver strategy prevalent with some private equity funds. The NY Bar and various stakeholders have raised multiple issues with the proposed...
January 27, 2016 read more
In Evans v Comm’r, the Tax Court disallows an ordinary loss from a foreclosure sale
In Evans v Comm’r,  the Tax Court disallows an ordinary loss from a foreclosure sale
The Tax Court released a few days ago Evans v Comm’r,  T.C. Memo. 2016-7.  This case offers a continued illustration of the perils of “facts and circumstances” Tax Court litigation. “Facts and circumstances” is a term of art in tax law that pops its head in almost every other page of the Internal Revenue Code. One of the few most topical for the investment industry instances of “facts and circumstances” include the “trader v. investor” issue, the “trade or business” issue, and last but not least the “dealer v....
January 13, 2016 read more
The PATH Act of 2015 makes the 100% QSBS gain exclusion permanent
The PATH Act of 2015 makes the 100% QSBS gain exclusion permanent
Protecting Americans from Tax Hikes (PATH) Act of 2015 was just signed by the President and is officially the law. The Act retroactively increases the Sec. 1202 QSBS gain exclusion for stock acquired in 2015 and prospectively makes the 100% exclusion permanent. Before the enactment of the PATH, only stock acquired before December 31st 2014 qualified for the 100% exclusion, thus, leaving out purchases made during 2015.  Under the Sec. 1202 QSBS rules, the gain eligible for exclusion could be as high as $10 million. Any gain above that amount is taxed at a maximum rate of 28 percent....
December 22, 2015 read more
In FFA 20154703F Chief Counsel blesses the taxpayer’s hedging transactions
In FFA 20154703F Chief Counsel blesses the taxpayer’s hedging transactions
The above referenced field advice was released a few days ago. The advice is heavily redacted but nonetheless, some useful information could be gleaned from it regarding the application of the hedging transactions identification rules and their interplay with the straddle rules. By way of background, various rules can negatively impact futures and forward hedges, such as the Sec. 1092 straddle rules, the Sec. 1256 mark-to-market rules and the capitalization rules of Sec. 263(g). Some of these issues can be avoided by identifying specific positions as hedging transactions under Reg....
December 03, 2015 read more
Repeal of TEFRA and Electing Large Partnership Rules
Repeal of TEFRA and Electing Large Partnership Rules
The Bipartisan Budget Act of 2015 (H.R. 1314) was just signed by President Obama. Basically the law repeals the so-called TEFRA and “electing large partnership” audit rules and replaces them with a new unified audit and assessment regime. TEFRA language is prevalent in every investment fund agreement. Generally you will see it in the tax matters partner section. The language addresses the rights and obligations of the TMP and the investors in case of an audit. Sometimes a fund would not be covered under TEFRA if it has less than 100 partners, but in most instances it would be...
November 04, 2015 read more
TD 9734: Treasury Releases Final and Temporary Section 871(m) Regulations
TD 9734: Treasury Releases Final and Temporary Section 871(m) Regulations
Treasury just released the highly anticipated Section 871(m) regulations. These regulations deal with dividend equivalent payments and are basically a re-souring rule that subjects various derivative instruments to withholding if the holder of the instrument is a foreigner. The newly issued regulations finalize a set of proposed regulations from December 2013, which succeeded another set of proposed regulations from 2012.  There was a lot of commentary about the proposed regulations, including on this website, and the overall sentiment was not very positive.  Various stakeholders...
September 17, 2015 read more
Carried Interest Loophole – Maybe not in Texas!
Carried Interest Loophole – Maybe not in Texas!
A few days ago the U.S. District Court for the Southern District of Texas issued an opinion that offers a glimpse into the 5th Circuit’s thinking on the carried interest issue. The decision is United States v. Stewart et al. and could be found here. In this case the U.S. sued two partners in an oil and gas partnership. The facts are as follows.  In year 2003, an investor named Hydrocarbon Capital, decided to acquire a portfolio of oil and gas properties from an unrelated corporation. However, the investor did not have the expertise to run and manage the properties. Therefore it...
August 24, 2015 read more
Proposed Regulation 1.707-2 makes the future of “fee waivers” dim!
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
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
“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
CCA 201525010: CODI, recourse v nonrecourse liabilities and tax uncertainties
CCA 201525010: CODI, recourse v nonrecourse liabilities and tax uncertainties
CCA 201525010 offers a useful insight and a cautionary tale regarding the unpredictability of certain recourse v. non-recourse liability issues in the partnership context. The issues which are the topic of the CCA arise primarily in the private equity fund context, and more often in the real estate context. What are the issues? When a project is held by an entity treated as a partnership and has some sort of financing, there is a substantive tax question regarding whether this financing is recourse or non-recourse for tax purposes. This determination could have various implications....
June 22, 2015 read more
W-8 and W-9 electronically signed print-outs, valid?
W-8 and W-9 electronically signed print-outs, valid?
Here is the kind of 21st Century issue that often makes investment fund compliance uncertain and complex. The issue was raised recently by the Association of Global Custodians which requested an update of the FATCA FAQ clarifying that electronically signed print-outs of W-8s and W-9s should be treated as valid documentation for withholding purposes. What’s the problem here? FATCA regulations allow investment funds to maintain electronic portals whereby they can collect various withholding forms electronically. Some funds have them some don’t. For the funds that do, instead of...
June 10, 2015 read more
Fargo and Girard Development v. Comm’r, T.C. Memo. 2015-96 – Yet Another Dealer v. Investor Travail
Fargo and Girard Development v. Comm’r, T.C. Memo. 2015-96 – Yet Another Dealer v. Investor Travail
The Tax Court just released a consolidated case (T.C. Memo. 2015-96) whereby Victor Fargo and its related entity Girard Development took an issue with the IRS’ “dealer” characterization of a sale of certain property held by Girard. This case is a classic example of the unpredictability of the quint-essential real estate tax issue: is the taxpayer a dealer or investor in real estate? Every real estate fund would be familiar with the problem and hopefully is addressing it in its PPMs, but to summarize, if the property held by the fund is found to be held for resale to...
May 27, 2015 read more
Sands Capital NOPA creates self-employment tax confusion
Sands Capital NOPA creates self-employment tax confusion
A few months ago, in March, Frank Sands (the principal and owner behind Sands Capital) filed a complaint in the Tax Court (Docket No. 5650-15) arguing that the IRS erroneously assessed close to half a million of self-employment tax with respect to certain income derived from Sands Capital Management, LP. The NOPA did not actually specify that the assessment was with respect to self-employment taxes but the taxpayer assumed so by crunching its own numbers. Under this presumption, the taxpayer proceeded to make an argument that under Sec. 1402(a)(13), there should be no self-employment tax...
May 19, 2015 read more
Regs. 1.446-3T and 1.956-2T change the treatment of “embedded loan” swaps and the related Sec. 956 definition of US property
Regs. 1.446-3T and  1.956-2T change the treatment of “embedded loan” swaps and the related Sec. 956 definition of US property
Treasury just pre-released RIN 1545-BM62 (1.446-3T and 1.956-2T introducing some changes to the application of the “embedded loan” rules and the definition of U.S. property for Sec. 956 purposes. This is not a topic that a typical private equity or hedge fund would face on a regular basis or would be familiar with, but for some participants that are more heavily involved in financial instrument derivative markets the new regulations may prove significant. The regulations do several things, but most importantly, they change the embedded loan rule and provide an exception to...
May 07, 2015 read more
Prop. Reg. 1.1297-4 Addresses Hedge Fund Reinsurance
Prop. Reg. 1.1297-4 Addresses Hedge Fund Reinsurance
Treasury is scheduled to release tomorrow the eagerly anticipated hedge fund reinsurance regulations. A pre-release version of the regulations has already been published by the Service and here we explore its most notable elements.  Hedge fund reinsurance has been one of those topics, like carried interest and fee waivers, which has reached the status of “evil” in the mass media. It is one of the topics that journalists or politicians alike grasp for when they want to point out how the rich take advantage of the Tax Code at the expense of the poor. As it may be,...
May 04, 2015 read more
Updated SIFMA Tax Positions Paper and National Taxpayer Advocate Comment on FATCA Duplicate Reporting
Updated SIFMA Tax Positions Paper and National Taxpayer Advocate Comment on FATCA Duplicate Reporting
In the past, the financial industry has had its share of headliner scandals which has spurred various regulatory proposals to rein an alleged behavior often portrayed in the press as “everything that is wrong with America.” It also seems that these days the financial industry is a favorite target for every politician that is ready and able to tackle Federal tax reform.  Whether it is closing tax loopholes, simplifying rules, or chasing criminals, you bet, your fund manager, accredited investor, or broker-dealer, will likely be the intended (and sometimes unintended)...
May 01, 2015 read more
SIFMA asks Treasury to Resolve FATCA “Self-certification” FAQ 10 Confusion
SIFMA asks Treasury to Resolve FATCA “Self-certification” FAQ 10 Confusion
The Securities Industry and Financial Markets Association (“SIFMA”) recently sent a comment to the U.S. Department of the Treasury asking for clarification regarding the following issue: Can FFIs residing in IGA 1 or 2 countries open an account as a U.S. reportable account for an investor who does not provide FATCA self-certification to the FFI? Currently FAQ 10 of the general compliance FAQ guidance (found here) provides a resounding NO.  Pursuant to section III, paragraph B, of Annex I of the IGA, the FFI must obtain a self-certification at account opening.  If the FFI cannot obtain...
March 31, 2015 read more
Regulation 1.1092(d)-1(d) in Action: Per CCA 20151201F a Contingent Payment Debt is a Straddle “Position.”
Regulation 1.1092(d)-1(d) in Action: Per CCA 20151201F a Contingent Payment Debt is a Straddle “Position.”
This CCA 20151201F was just released and it reiterates the IRS’ longstanding position that a debt could be a “position” with respect to personal property, and therefore can be a part of a straddle, with the ultimate result of disallowing any interest deduction on the debt under IRC §263(g)(1). This is not a new position from the Service, but the ruling is notable because it appears to be the first ruling that relies on Regulation §1.1092(d)-1(d) which was promulgated in August last year.In that past, some hedge funds would take the view that debt could be a “position” in...
March 23, 2015 read more
Senate Committee on Finance: Use of Collars, Forwards, Swaps and Other Derivatives Decrease Taxpayer Equity
Senate Committee on Finance: Use of Collars, Forwards, Swaps and Other Derivatives Decrease Taxpayer Equity
The Senate Committee on Finance came out with a report a few days ago titled “How Tax Pros Make the Code Less Fair and Efficient: Several New Strategies and Solutions.” In the report, the Committee outlines various uses of derivatives that according to the Committee make the Code unfair to the average Joe. The report takes the form of a comparison of the taxes that a middle class American family earning $100k would pay and the taxes a sophisticated party with a derivative market counterparty connection would pay. You would guess what the drift of the report is.  Average Joe...
March 05, 2015 read more
Pilgrim’s Pride is Reversed in the 5th Circuit
Pilgrim’s Pride is Reversed in the 5th Circuit
Over a year ago, Pilgrim’s Pride litigated a Section 1234A issue in the Tax Court. The issue was whether the taxpayer could claim an ordinary business loss on the abandonment of securities, and more importantly, whether  Section 1234A applies to the direct abandonment of securities as compared to the abandonment of “rights with respect of” securities. The taxpayer lost in the Tax Court but it prevailed in the 5th Circuit (Pilgrims's Pride v. Comm’r; No. 14-60295), and on top of that, quite spectacularly. The decision was published yesterday.In the private M&A and private...
February 26, 2015 read more
CCA 201507019 – Sec. 7701(g) Nonrecourse Debt Relevant for Sec. 475 Mark-to-Market, IRS Says
CCA 201507019 – Sec. 7701(g) Nonrecourse Debt Relevant for Sec. 475 Mark-to-Market, IRS Says
Here we have what appears to be a novel issue that could potentially resolve some confusion that various securitization financial players might have had in the past. The question CCA 201507019 answers is whether financial institutions who mark-to-market their portfolios under Sec. 475 must factor in their fair market value calculations any Sec. 7701(g) nonrecourse debt that encumbers the portfolio. Succinctly, the answer is yes. To those who do not recall what Sec. 7701(g) is about, it basically enacts the principles set forth in the famous Tufts case that most LLMs study in their first...
February 18, 2015 read more
SIFMA asks the IRS to issue a FAQ regarding “document repositories” under Regulations 1.1471-3(c)(6)(iv) and 1.1441-1(e)(4)(iv)(C)
SIFMA asks the IRS to issue a FAQ regarding “document repositories” under Regulations 1.1471-3(c)(6)(iv) and 1.1441-1(e)(4)(iv)(C)
We wanted to pass the following along in case you missed it. Apparently SIFMA members, who encompass some of the largest investment funds and financial institutions in the Country, are in a predicament regarding document repositories and whether current practices with respect to those repositories meet FATCA regulations. Investment managers have to provide various forms such as W-9s or W-8BEN-Es to withholding agents to open accounts and receive transaction authorization. For managers who have relationships with hundreds of investment funds this would encompass a lot of documents. According...
February 10, 2015 read more
Private Equity Management Fee Waivers – the Latest by Andy Grewal, Gregg Polsky and Others
Private Equity Management Fee Waivers – the Latest by Andy Grewal, Gregg Polsky and Others
This is not breaking news, but in light of the supposedly upcoming guidance regarding management fee waivers, we wanted to write a short bit about the status quo. We also want to highlight an article by Andy Grewal, which we thought did not get sufficient exposure commensurate with its quality.  First a short description of what a fee waiver/conversion is. In a private equity fund the typical compensation structure is “two and twenty.” The twenty could be held by the same entity or a different entity from the one that holds the “two.” The “two” reflects fees for management...
February 04, 2015 read more
Partnership Interest in A Scratch-and-Dent Distressed Debt Master Fund Qualifies as a “registered form obligation”
Partnership Interest in A Scratch-and-Dent Distressed Debt Master Fund Qualifies as a “registered form obligation”
PLR 201504004 is a bit of an esoteric ruling. It deals with the narrow issue of the availability of the Reg. 1.871-14(a) portfolio interest exemption to funds that invest in distressed securities that are not in registered form. As a background, the portfolio interest exemption provides that the receipt of interest is not subject to tax in the hands of a nonresident investor if the obligation is in registered form. Most obligations are. However, there are number of distressed obligations that are not. One such type of obligation is a scratch-and-dent mortgage. These are mortgages with...
January 26, 2015 read more
CCA 20145102F: Three Years after CCA 201104031 Taxpayers Apparently Persist on Claiming Open Transaction on the “Short Sale” Unwind of a Variable Prepaid Forward
CCA 20145102F: Three Years after CCA 201104031 Taxpayers Apparently Persist on Claiming Open Transaction on the “Short Sale” Unwind of a Variable Prepaid Forward
About 3 years ago we described a ruling, CCA 201104031, disagreeing with a strategy implemented by some taxpayers in closing variable prepaid forwards (VPFs). The strategy was based on a reading of PLR 200440005 and involved the borrowing of open market shares and delivering those shares at the VPF close (instead of delivering the originally pledged VPF shares). The taxpayer who delivers the borrowed shares claims that is taking a short position and that there should be no gain recognized when the VPF is closed (the original CCA coverage could be found here). In essence, the short position...
January 14, 2015 read more
CCA 201501013 – An Inbound Fund Runs into a U.S. Lending Trade or Business Mishap of Enormous Proportions
CCA 201501013 – An Inbound Fund Runs into a U.S. Lending Trade or Business Mishap of Enormous Proportions
U.S. lending trade or business is one of those issues that haunt U.S. investment fund tax advisers like the boogie man. If you get it wrong, a lot of things go bad. To outline the issue succinctly, inbound investment funds with foreign investors are generally not subject to tax on interest income and capital gains. However, if this income is derived from a U.S. lending business, the income is taxed on net basis. So, if you get it wrong, you go from a situation of no tax (for example on interest under the portfolio interest exemption), to a situation of 39.6% tax (plus possibly state tax)....
January 06, 2015 read more
Fund Principals – Here is What not to Do in Your Private Foundations
Fund Principals – Here is What not to Do in Your Private Foundations
It is common for high profile private equity or hedge fund principals to run private foundations or other charitable organizations. The principals would be “disqualified persons” but the foundations would nonetheless have some room for investing in the underlying investment funds sponsored by the principals without triggering UBTI and excise taxes. The charitable organization sponsored by the principal then will either be subject to 2% private foundation excise tax on its investment income, or no tax, if for example the organization is classified as a supporting organization under IRC...
November 24, 2014 read more
In Brinkley v. Comm’r, T.C. Memo. 2014-227, all Goes Wrong for the Taxpayer
In Brinkley v. Comm’r, T.C. Memo. 2014-227, all Goes Wrong for the Taxpayer
Here is a case that showcases how a routine business transaction could lead to tax grief for the parties involved. In this case we have a founder, CIO exec, who worked for a company called Zavers. The CIO was paid a salary, a bonus, and also received restricted shares, much like many founders and principals in venture capital start ups. Originally, he owned approximately 10% of the company. As it happens, the exec was diluted by later investment rounds and tried to negotiate with Zavers a minimum of 3% interest, or else, he would leave. There was no official documentation to that...
November 03, 2014 read more
CCA 201442053 – Partnership Freeze Gone Awry
CCA 201442053 – Partnership Freeze Gone Awry
The IRS released a few days ago the above-mentioned CCA, which illustrates the gory pitfalls of Sec. 2701. In this ruling, the IRS had to opine whether the recapitalization of a family partnership would be subject to Sec. 2701. The parties here attempted a partnership freeze. This is an estate planning technique whereby the older generation retains a fixed interest in the partnership and transfers future profits to the younger generation. Thereafter, the older generation could gift portions of the retained interest annually within the limits of the annual gift exclusion. Alternatively, the...
October 23, 2014 read more
Here Comes FATCA “Phishing”
Here Comes FATCA “Phishing”
It did not take long for sophisticated scam artists to start exploiting FATCA. A few weeks ago we reported the first indictment that we know of whereby several individuals allegedly were selling to overly-entrepreneurial U.S. individuals a runaround FATCA scheme.  Yesterday the IRS came out with a Phishing alert warning FFIs that there are scam artists out there who would call the institution pretending to be the IRS and asking for account information. Now, this IRS phishing scam has a long history here in the U.S. We would like to think that most U.S. residents and citizens know better...
September 25, 2014 read more
In Topsnik v. Commissioner the Tax Court Rejects Fiscal Avoidance Attempt in the Sale of Shares
In Topsnik v. Commissioner the Tax Court Rejects Fiscal Avoidance Attempt in the Sale of Shares
Here is a case that came out yesterday where the taxpayer tried to have its cake and eat it too. While the case does not address expressly an investment fund or its LPs one can draw parallels to the fund industry. What was the issue? Many treaties have various mechanisms that are in a way designed to mitigate fiscal avoidance, i.e. situations where a particular person does not pay tax in any jurisdiction. This mechanism can take various forms but most generally it would manifest itself in some requirement affording treaty benefits only if the specific person pays income tax in one of the...
September 24, 2014 read more
FATCA, Sure! But Cheaters will be Cheaters
FATCA, Sure! But Cheaters will be Cheaters
I have expressed my views about FATCA before. My belief is that while it is a well-intentioned law standing on a higher moral ground, its added complexity and international fallout overshadow its utility. In other words, I personally think that its benefits outweigh the burdens. There was a very thoughtful letter not long ago by Mr. A. Pelling addressed to the Treasury and published by TNT, asking Treasury to quantify the cost of implementing FATCA and its burden versus the expected benefit in revenues from its implementation.  I’d be curious if Treasury responds. As it may be, the point...
September 11, 2014 read more
ILM 201436049: An Unknown Hedge Fund Gets a Self-Employment Tax Slap from the IRS
ILM 201436049: An Unknown Hedge Fund Gets a Self-Employment Tax Slap from the IRS
Apparently some investment funds continue to take the position that their 2% service fee income is exempt from the self-employment tax (“SET”) under the “limited partner” exception of Sec. 1402(a)(13). These positions are often based on advice by counsel that there is a material distinction among an LLC, LP and LLP when it comes to this issue. I have reasoned here that in light of the proposed regulations and the Renkemeyer decision, these arguments are rather aggressive.  In the above-quoted ILM, the IRS tacitly seems to disagree with the view that the type of entity matters as...
September 08, 2014 read more
Net Investment Income Tax and US Territories – Take Two
Net Investment Income Tax and US Territories – Take Two
Not long ago we pointed out here that apparently there is significant confusion regarding the applicability of the NIIT to residents of the U.S. Virgin Islands and Puerto Rico. There we discussed that there is conflicting information coming from BIR and Treasury and that LPs ought to talk to their CPAs right away. Apparently, the CPAs are also at a loss because today came out a comment by AICPA asking Treasury once and for all to come out on the record and clarify whether US Virgin Island residents have to pay the tax. Basically, the AICPA very nicely said, please, please Treasury, none of...
August 13, 2014 read more
Is a Failure to File an FBAR Covered under the Tax Indemnity in a Stock Purchase Agreement?
Is a Failure to File an FBAR Covered under the Tax Indemnity in a Stock Purchase Agreement?
My job as a lawyer is to worry about the client’s finances and think of various scenarios that could cost my clients. One worry that has occupied my mind in the past has to do with FBARs and Stock Purchase Agreements. Imagine you are a private equity fund and you purchase a later stage private company. Among the myriad of documents that you will probably sign is a Stock Purchase Agreement, Unit Purchase Agreement (or some other similarly designated purchase and sale agreement if the company is a pass-through entity).   Typically you would hire accountants to do due-diligence. They will...
July 11, 2014 read more
W-8BEN-E Instructions are Released – Tax Policy Meets Reality
W-8BEN-E Instructions are Released – Tax Policy Meets Reality
In my last post regarding W-8BEN-E, I observed that some foreign businesses were in a predicament because withholding agents started asking for the form but there were no instructions. I asked "for how long" will this continue and the IRS answered - until June 24th.  Aside any jokes that the IRS is actually taking queue from my blog posts, as practitioners had hoped, the IRS released instructions before the July 1st FATCA deadline. As a lawyer, I don’t do much reporting and I would not comment on the intricacies of the form. However, I have a few practical observations.  I...
June 26, 2014 read more
CCA 201423019 – a Bona Fide Section 475(f) Election Nightmare
CCA 201423019 – a Bona Fide Section 475(f) Election Nightmare
This CCA was released by the IRS a few days ago. Two things caught my eye here. First it dealt with agency issues, something that any offshore trader or lender fund ought to be interested in, and two, it dealt with what appears to be a belated 475(f) election. The facts are not overly elaborate.  What seems to be a domestic Holdco taxpayer had X% interest in a lending business conducted through Partnership X.  Partnership X engaged in originating and purchasing mortgage loans on the open market and also participated in mortgage backed securitization activities. The securities were...
June 11, 2014 read more
W-8BEN-E in No-Man Land Until….When?
W-8BEN-E in No-Man Land Until….When?
On this blog I’ve voiced my skepticism about FATCA, both as a policy rationale and as a logistical undertaking. Recently I started observing the effects of something I can only describe as a blunder on part of the U.S. taxing authorities. So, W-8BEN-E is out for a few months now. Many people waited eagerly for the form to be released.  What happened, however, is that there are no instructions! Well, that apparently does not prevent some withholding agents from sending out the form to foreign businesses. I would describe this as overzealousness that is not necessarily valid or logical....
June 04, 2014 read more
Real Estate Investor Argument - Continuing Travails in Allen v U.S.
Real Estate Investor Argument - Continuing Travails in Allen v U.S.
When it rains, it pours.  Just a few weeks after the Tax Court’s decision in Boree, the US District Court for the Northern District of California held against the taxpayer in Allen et al. v. United States, No. 3:13-cv-02501 (May 28, 2014). In a much familiar fact pattern the taxpayer acquired real estate, tried to develop it and sold it down the road. He claimed capital gains but the IRS and the District Court disagreed. As with many other cases that end all the way up in court, the taxpayer struggled with evidence regarding material issues. Also, as with many other small cases (in this...
May 30, 2014 read more
Boree v. Comr: Tax Planning Left on the Back Burner, Sometimes it Comes to Bite You
Boree v. Comr: Tax Planning Left on the Back Burner, Sometimes it Comes to Bite You
I see this over and over. The reality is that to business people, particularly in M&A, tax is an afterthought. This is more so true for smaller investment funds and investors. Larger entities with more extensive experience, while dreading dealing with tax, at least know what’s at stake. In ordinary income v. capital gain differential situation with penalty exposure, a mishap easily would bite over 20-30% into your profitability. That’s a large percentage! This is what Mr. Boree is learning from experience right now. I am talking about the newest real estate case of Boree v. Comr....
May 15, 2014 read more
Net Investment Income Tax and US Territories – Confusion and Inequality Abound
Net Investment Income Tax and US Territories – Confusion and Inequality Abound
Filing season is done for taxpayers without extensions and will soon be approaching for those with extensions. One item on the menu that is new is the NIIT. That item slices a 3.8% cut off the investor’s revenue and forwards it promptly to Uncle Sam.  Amid confusion regarding trusts, S corporations, real estate, netting losses and so on, apparently there is some confusion regarding the application of the NIIT to US territories. We were not aware of that confusion until today when we reviewed one USVI law firm’s plea to Office of International Tax Counsel to clarify the NIIT...
May 14, 2014 read more
Notice 2014-21: Treasury Lays the Law on Bitcoin
Notice 2014-21: Treasury Lays the Law on Bitcoin
The investment fund industry's involvement in Bitcoin is in its nascent stages. Some early adopters, however, believe that this is the future. The Winklevoss brothers have been working on launching the first Bitcoin ETF and Second Market has already launched the first Bitcoin Investment Trust.  On the hedge fund front, Pantera Capital recently registered Pantera Bitcoin Advisers with reportedly a total value of $150m. Apparently Fortress is behind the fund. Separately, there are a myriad of pool vehicles that mine Bitcoins. These are basically online portals where individual or enterprises...
March 26, 2014 read more
Should the Reduction in a Listed Option Premium for an Estimated Dividend be Treated as a Dividend Equivalent Payment under 871(m)?
Should the Reduction in a Listed Option Premium for an Estimated Dividend be Treated as a Dividend Equivalent Payment under 871(m)?
The 2013 871(m) proposed regulations have left many in the hedge fund, trading and securities industries up in arms. I recently pointed out here that the regulations as drafted would subject some single stock futures to withholding.  I did not focus on listed options, but I recently read a great comment by the U.S. Securities Markets Coalition which basically highlights the same problem for options.  In this blog entry, I’d like to lay out my 2c on this issue. What is the problem? The problem is that the formula for calculating the premium on listed options includes an estimate for...
March 10, 2014 read more
Yet Another “Trader” Argument Doomed at the Tax Court Level
Yet Another “Trader” Argument Doomed at the Tax Court Level
As I’ve been following and discussing here on this blog, in the last few years the Tax Court has been on a roll. Everything that comes through its doors related to trader status and claiming ordinary losses from trading activities appears to be doomed from the get go if the taxpayer is an individual and does not carry on trades every single day of the year. God forbid the trader has another occupation from which it derives the majority of its income. That makes the Tax Court’s test for trader status almost impossible to meet for any non-trader professional that may be trading as...
February 26, 2014 read more
The AICPA Lends a Helping Hand to the IRS on Targeted Allocations
The AICPA Lends a Helping Hand to the IRS on Targeted Allocations
A few weeks ago the AICPA came out with a proposed draft targeted allocation ruling with the hope that the IRS will issue much needed guidance regarding whether this type of allocations work for Sec. 704(b) purposes. Targeted allocations are prevalent in private equity deals at the portfolio company level. Basically, instead of adopting a layer cake approach that follows the distribution waterfall, the targeted approach utilizes a targeted capital account that is based on that waterfall and allocates either net, or gross, income or loss of the partnership at the end of the year so that each...
February 25, 2014 read more
The Days of the Bottom-Dollar Guarantee Are Numbered
The Days of the Bottom-Dollar Guarantee Are Numbered
It is official. A few weeks ago Treasury released the promised Sec. 707 and 752 proposed regulations (REG-119305-11). While the Regulations propose various material changes that could affect funds and their business, the one that stands out is the obliteration of the “bottom-dollar” guarantee. While the “bottom-dollar” guarantee is most common in the real estate fund industry, it could show up in any type of leveraged partnership deal that attempts to divest an investor on a tax deferred basis. I would imagine that readers are familiar with the disguised sale leveraged distribution...
February 11, 2014 read more
Failed Related Party Real Estate Installment Sale in Cordell D. Pool v. Com’r
Failed Related Party Real Estate Installment Sale in Cordell D. Pool v. Com’r
Real estate investors desire capital gains treatment.  Actually receiving such capital gains treatment, however, proves to be difficult particularly when development activities are afoot. The Cordell D. Pool case (T.C. Memo. 2014-3) that came out yesterday presents a cautionary tale to opportunistic private real estate funds that have their hands entrenched in development activities, whether through related, or third-party developers.  The facts of the case involve a relatively typical related party installment sale transaction whereby the putative investor purchases land and then sells...
January 09, 2014 read more
Net Investment Income Tax and Tax Distributions
Net Investment Income Tax and Tax Distributions
Now when the New Year celebrations are out of the way, more prosaic duties poke their head around the corner, such as, Tax Time. Depending on the investment fund, K-1s may start rolling out in late February or March, if investors are lucky. This year, funds and their investors will have to deal with yet another tax, the net investment income tax (NIIT). This tax is brand new and the IRS forms and instructions are still being finalized. One thing is clear though, that investment funds will have to provide investors with enough information so that investors can compute their NIIT. Investors...
January 02, 2014 read more
Rev. Proc. 2014-12: New Safe Harbor for Tax Equity Deals
Rev. Proc. 2014-12:  New Safe Harbor for Tax Equity Deals
Yesterday Treasury released the much anticipated post- Historic Boardwalk safe-harbor applicable to certain tax equity deals. This is the second safe-harbor that the IRS has released in the domain of tax equity transactions. The first one was released in 2007 (Rev. Proc. 2007-65 applicable to wind energy projects). For readers that do not specialize in this area, tax equity transactions are prevalent in the energy sector and other sectors that offer tax credits or other incentives to stimulate particular activities (for example, historic rehabilitation in the case of Historic Boardwalk). ...
December 31, 2013 read more
Dividend Equivalent Proposed Regulations Clip the Wings of Single Stock Futures
Dividend Equivalent Proposed Regulations Clip the Wings of Single Stock Futures
On December 5th Treasury released final and proposed regulations under Sec. 871(m).  This section deals with dividend equivalent payments and it was designed to shut down tax avoidance run around U.S. dividend withholding rules.  For previous coverage, see here. The regulations withdraw a set of previous proposed regulations (from Jan 2012) and replace them with a regime which appears to be more detrimental to the hedge fund industry.   Many of the provisions of the proposed regulations do not kick in until several years down the road (for e.g. rules on Specified ELIs apply after...
December 10, 2013 read more
A Timely Reminder To Pay Reasonable Compensation
A Timely Reminder To Pay Reasonable Compensation
Last week, another Tax Court opinion came out slapping down an S corporation shareholder-employee for not taking out reasonable compensation.  As in all of these cases, the taxpayer’s motive in Sean McAlary Ltd, Inc. v. Commissioner, T.C. Summ. Op. 2013-62, is pretty obvious: the S corporation’s income after deducting salary expenses is passed through to the shareholder and taxed as ordinary income.  However, the amount paid out as salary is subject to payroll taxes, in addition to being taxed as ordinary income at the shareholder level.  Where there is only one shareholder, there is...
August 19, 2013 read more
Sun Capital: Trade or Business Armageddon Talk
Sun Capital: Trade or Business Armageddon Talk
For various reasons, I have not posted on the blog for a while, but the recent Sun Capital decision and the related discussion in certain high profile publications, ABA meetings and such, caught my attention. I am not going to go into detail facts discussion of the Sun Capital 1st Circuit court decision (Sun Capital Partners III LP et al. v. New England Teamsters & Trucking Industry Pension Fund et al., No. 12-2312 (1st Cir. 2013)) but the gist is as follows.In Sun Capital, the 1st Circuit Court of Appeals reversed and remanded in part a decision of a lower U.S. District Court of...
August 09, 2013 read more
Noncompensatory Option Regs are Finalized: Where do Mezz Funds go from Here?
Noncompensatory Option Regs are Finalized: Where do Mezz Funds go from Here?
The noncompensatory option regulations have been subject to much debate and discussion, including by me on this blog. After many, many years in circulation, the famous or infamous proposed regulations were just finalized. Considering that the final regs came out just a few hours ago, I have not had the time to fully review and compare them to their proposed version, but nonetheless, I wanted to alert readers about this development. Finalizing the regulations is important because they will become immediately applicable for all deals that are closed after the date the regulations are...
February 04, 2013 read more
NEWT Act Reintroduced
NEWT Act Reintroduced
For those who keep up with the net investment income tax (NIIT) and the S-corporation planning touted by many practitioners as a solution for minimizing both NIIT and employment tax, here is a fresh news to keep in mind.  The Narrowing Exceptions for Withholding Taxes Act of 2013, or so called NEWT Act (purportedly named after former House Speaker Newt Gingrich) was reintroduced in the House this January 22 by Charles Rangel.  This Bill is not new. It was also introduced in the 112th Congress and even prior to that with the American Jobs and Closing Tax Loopholes Act of 2010 (Sec. 413 of...
February 01, 2013 read more
A Few Additional Thoughts on the Net Investment Income Tax
A Few Additional Thoughts on the Net Investment Income Tax
I spent some more time with the NIIT proposed regulations and I also reviewed quite a few alerts by reputable firms and articles by renowned tax practitioners.  There are two buzz words that popped up in my NIIT adventures: “S-corporation” and “grouping activities.”  It seems like practitioners are focused on these two elements in their tax planning pitches to potential clients looking to minimize NIIT.  I have my doubts about carrying out any tax planning based on proposed regulations, considering that the regulations could change, and in the interim Treasury would have the...
January 25, 2013 read more
Net Investment Tax Proposed Regs are Out!
Net Investment Tax Proposed Regs are Out!
I am a bit late to the party since the regulations actually came out a few days ago, but nonetheless, I wanted to share my first impressions. These have been long awaited by the community and they do not disappoint. One hundred and fifty nine pages, including the preamble, but I am not going to belabor the point of complexity and volume; I have been ruminating complexity enough on this blog. Per my preliminary review, the proposed regulations cover many of the points that the community expected them to cover, e.g. issues related to attribution of manager’s business, CFC/PFIC issues,...
December 11, 2012 read more
Moving from FS-2011-13 to Streamlined FBAR Compliance
Moving from FS-2011-13 to Streamlined FBAR Compliance
So the IRS has moved one step closer to providing US taxpayers living abroad with somewhat of an easier and clearer compliance procedure for filing delinquent FBARs.  The possible recipient of this boon is a client with a story that goes like this. I lived in the US, I moved out, I paid taxes in the country I lived in, I haven’t been back in the US for many, many years. One day I wake up and I read in the news that there is a form called FBAR and the US Government is going after people that have not filed those forms, and possibly criminally prosecuting them.  A concerned citizen would...
September 04, 2012 read more
Management Fee Conversion Under Attack – Why now?
Management Fee Conversion Under Attack – Why now?
The New York Times and many other news sources broke a story this weekend about the NY attorney general subpoenaing several major private equity firms, including Bain Capital, among those, for allegedly abusive management conversion fee practices.  I don’t have access to the subpoenas but the NY Times article describes the strategy in sufficient detail, a strategy that has been known to me as “fee conversion” or a “fee waiver.”  In this strategy, the manager waives, or hard wires a conversion, of the management fee so that it receives a larger percentage in the carry.   I...
September 04, 2012 read more
Summer Recap: A Few Notable Investment Fund Tax Related Developments
Summer Recap: A Few Notable Investment Fund Tax Related Developments
I haven’t posted too much as of late due to vacation, spending more time with the family, and a somewhat busier summer season as far as investment fund deals go.  To catch up, I will recap below a few fund related tax developments that I thought were notable in the last several months.Form 8938 Q&AIRS updated the Q&A that it initially posted in February 2012 regarding Form 8938.  I have discussed on this blog that the form will be applicable to US investors in foreign funds considering that it captures holdings in stocks, securities and partnership interest in foreign...
August 27, 2012 read more
Proposed Section 83 Regulations Adopt the Lock-up Agreement Reasoning of Rev. Rul. 2005-48
Proposed Section 83 Regulations Adopt the Lock-up Agreement Reasoning of Rev. Rul. 2005-48
Several days ago Treasury issued Prop. Reg. §§1.83-3(c) and (j) (REG-141075-09). In these proposed regulations the IRS adopted the reasoning of Rev. Rul. 2005-48 as to the interplay between lock-up agreements and Section 83 of the Code. The ruling and the proposed regulations basically stand for the proposition that a lock-up agreement alone does not cause the compensatory shares to be substantially nonvested, and thus, it does not prevent the taxation of the shares under Section 83 at the time of receipt. These principles are illustrated by Ex. 6 of Prop. Reg. § 1.83-3(j).How can these...
May 31, 2012 read more
Beware of the PTP Rules: Who Ends up Liable if a Secondary Transfer Triggers Section 7704?
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
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
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
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
Financial Transaction Tax in Europe: U.S. Managers Should Keep Their Eyes Open
Financial Transaction Tax in Europe: U.S. Managers Should Keep Their Eyes Open
The idea of a financial transaction tax has been largely unsuccessful in the United States. Last year's proposal by Representative Peter DeFazio and Senator Tom Harkin to impose a 0.03%  tax on financial transactions did not get any traction in Congress. Similarly, the proposals to tax currency transactions failed without much support. The latest incarnation of a currency transaction bill by Pete Stark was discussed on this blog here.   However, it appears that the winds of change in Europe blow more forcefully than those in the U.S.  While there isn't much development regarding an...
March 22, 2012 read more
FATCA Proposed Regulations Battle for the Top Spot at the Apex of Regulatory Complexity
FATCA Proposed Regulations Battle for the Top Spot at the Apex of Regulatory Complexity
So, while I was in the hospital and on medical leave, Treasury released the much-anticipated proposed FATCA regulations. I came home and I was welcomed by a 400-page thicket of what appears to be one of the most significant Treasury regulatory projects in many years.  By the time I am writing this, most law and accounting firms have released summaries of the regulations and have offered their 2 cents on the issues arising from FATCA. Trying not to overlap with what others have said, I would like to add a few policy observations and some points that are specifically pertinent to investment...
March 15, 2012 read more
PLR 201152010: Damages Arising from the Acquisition of Target Treated as Return of Capital
PLR 201152010: Damages Arising from the Acquisition of Target Treated as Return of Capital
When representing investment funds, and particularly private equity funds which often engage in large buy or sell side M&A deals with significant sums of money at stake, it is not uncommon that a deal gets contentious. A fund could find itself in a number of interesting predicaments when it is participating as a purchaser in an auction process where the target happens to be a very lucrative asset sought after many bidders. Sometimes there could be company internal or external interests, such as disgruntled minority shareholders, that are pushing for an increase of the final purchase...
January 16, 2012 read more
New Section 892 and 6038D Regulations, Anschutz and a few other recent tidbits
New Section 892 and 6038D Regulations, Anschutz and a few other recent tidbits
The following will be one relatively large post that will cover some of the more notable developments since my last blog which unfortunately was quite awhile ago. It has been a bit more difficult for me to post as of late due to a large number of transactions closing towards yearend and some personal matters.  I will try to cover things in chronological order.Section 892 Proposed Regulations Clarify Some Sovereign Fund Issues Sovereign funds are significant and active participants in investment funds not only in the United States but in many other countries.  Most jurisdictions have some...
December 28, 2011 read more
The Foreign Fund's FATCA Dilemma - A New White Paper by Navigant
The Foreign Fund's FATCA Dilemma - A New White Paper by Navigant
I've been posting some of the FATCA white papers prepared by Navigant's FATCA task force on this blog. Continuing this practice, I just received the latest one from my colleague Rich Kando at Navigant's Disputes and Investigation Practice and I wanted to share it with the readers.  This presentation deals specifically with foreign funds and some of the specific impact assessment those funds need to be doing right now in preparation for FATCA. Here is the paper:
October 20, 2011 read more
Carried Interest Proposal Blocked in the Senate Yet Again
Carried Interest Proposal Blocked in the Senate Yet Again
This will be a short post. Recently I mentioned on this blog that the Carried Interest legislation is resurfacing again courtesy of Obama’s efforts and the American Jobs Act of 2011. In my post I reasoned that, well, this time the effort may have some legs considering the economic and political climate in the country. Oh, was I wrong!  Contrary to my guess, and making my guess look that sillier, the Senate shut down the bill yesterday in a pretty uniform fashion with all Republicans voting against opening a debate. Democrats are disappointed of course, and if you judge by the post vote...
October 12, 2011 read more
A Multimillion Dollar Settlement Allocation Slap on the Wrist
A Multimillion Dollar Settlement Allocation Slap on the Wrist
Investment funds litigate and settle cases like many other taxpayers. The settlement process is usually handled by litigators, in-house or otherwise. Some litigators are attuned and aware of the tax issues related to settlements and others are not. As it may be the case, settlements have significant tax consequences, and as the recent decision of Healthpoint v. Commissioner, T.C. Memo. 2011-241 (October 3, 2011) demonstrates, could lead to further tax related litigation and penalties. What’s usually at stake? The two key tax elements of a tax settlement are character of income inclusion...
October 06, 2011 read more
Henricus v. Comm’r.: a Trader v. Investor Déjà vu
Henricus v. Comm’r.: a Trader v. Investor Déjà vu
It seems like as of late the Tax Court is set on slamming every person that comes through its doors claiming a trader status.  It feels like it was yesterday when I talked about the Richard Kay case on this blog. There I alluded that a taxpayer who seemed to fall within the category of what most people in the trading community would call a swing trader ended up being treated as an investor.  On top of that the taxpayer was hammered with a Section 6662 penalty. Well, roll forward a few months and we have the same story all over again. The Tax Court just decided the following case Henricus...
September 30, 2011 read more
Santa Clara – a Warrant Causes the Termination of S Election
Santa Clara – a Warrant Causes the Termination of S Election
Sometimes funds come across a suitable portfolio company that is an S Corporation. Because of the limitations on shareholders and second class of stock, funds could not acquire equity directly in the S corporation. To mitigate this issue the fund could do a number of things such as restructure the company prior to the investment (e.g. have the S corporation contribute assets to an LLC and invest in that LLC.). Sometimes a restructuring is not feasible and the fund may either walk away from the portfolio company or contemplate acquiring debt and/or warrants in the company. The hope is that...
September 27, 2011 read more
The Tax Treatment of Credit Default Swaps is Finally Clarified
The Tax Treatment of Credit Default Swaps is Finally Clarified
One of the major frustrations I’ve had with the taxation of derivative instruments, such as swaps, is the unsettled state of the pertinent law, including some basic issues like characterization for tax purposes and related definitions. Until now, the tax characterization of Credit Default Swaps (CDS) represented some of the more striking examples of this type of a problem. If I have to summarize the issue, the major problem with figuring out how to tax CDS was that they do not fit too well in any of the closely related categories of instruments for which there is already published...
September 26, 2011 read more
Proposals to Tax Carried Interest at Ordinary Rates are Back
Proposals to Tax Carried Interest at Ordinary Rates are Back
It seems that the efforts to tax investment fund managers’ performance compensation at ordinary income rates had subsided for a long time. Those readers that have followed the issue know that these efforts have been largely unsuccessful since the early inception of the first Carried Interest bill by Senator Levin in year 2007. Now, the Carried Interest proposal resurfaces yet again in the form of a revenue raiser in another Obama favored legislation titled the “American Jobs Act of 2011” (S.1549; H.R.2911). While there are some substantive differences from prior installments, the...
September 26, 2011 read more
A Few Developments from the Past Couple of Weeks: FATCA, Stop Tax Haven Abuse Act and Monetization Strategies
A Few Developments from the Past Couple of Weeks: FATCA, Stop Tax Haven Abuse Act and Monetization Strategies
Here are a few things that caught my eye when I was on vacation for the past couple of weeks in my home town of Varna, Bulgaria. I will list them in chronological order and I’ll briefly mention why I found them notable.The Reintroduction of the Stop Tax Haven Abuse ActThis bill is not new. It was first introduced by Senator Levin in 2009 with the idea of battling corporate tax shelters. The thrust of the law was the idea of curtailing abuses by treating certain foreign corporations as domestic corporations if their management and control was within the US. Had it been enacted, this Act...
August 01, 2011 read more
Richard Kay, Jr v. Comm’r – Trader or Investor, Sometimes it Feels like a Coin Toss
Richard Kay, Jr v. Comm’r – Trader or Investor, Sometimes it Feels like a Coin Toss
Richard Kay, Jr v. Comm’r., T.C. Memo. 2011-159 (July 6, 2011) is yet another case that tackles the facts and circumstances query of a trader v. investor. Facts and circumstances is one of those things that you really cannot be sure what would come out of.  Many would argue that in cases that turn on the facts and circumstances inquiry there is a very high element of chance and sometimes they feel more or less like a coin toss.Why does the question of a trader v. investor matter to many people? Well, if a person buys and sells the same securities within the taxable year, in either case...
July 07, 2011 read more
Hendrix v. Commissioner – The Government Loses Another Defined Value Clause Argument
Hendrix v. Commissioner – The Government Loses Another Defined Value Clause Argument
Gift and estate planning is a major component of private equity, venture capital and hedge fund taxation. The issues come up in the context of an investment manager’s individual tax planning. Investment managers typically own a profits interest in a general partnership that in turn has a 20% profits interest in one or several funds, or alternatively a management contract with the investment funds under management.  The value of the manager’s interest in the GP is minimal at the outset. The reason is that the managed investments themselves have not appreciated in value.  If the manager...
June 30, 2011 read more
IRS SUSPENDS TWO ANNUAL REPORTING REQUIREMENTS – GIVING RELIEF FOR CERTAIN FOREIGN FINANCIAL ASSETS REPORTING AND PFIC REPORTING (NOTICE 2011-55)
IRS SUSPENDS TWO ANNUAL REPORTING REQUIREMENTS – GIVING RELIEF FOR CERTAIN FOREIGN FINANCIAL ASSETS REPORTING AND PFIC REPORTING (NOTICE 2011-55)
On June 17, 2011, the IRS issued Notice 2011-55.  In the notice, the IRS suspended (but not excused) the annual information reporting requirements (1) under IRC Section 6038D for individuals who hold interests in specified foreign financial assets during the applicable taxable year having an aggregate value in excess of $50,000 and (2) under IRC 1298(f) for US Persons who are shareholders of Passive Foreign Investment Company (PFIC).Because the filing requirements under IRC Sections 1298(f) and 6039(D) are only suspended and not excused, fund tax administrators should implement procedures...
June 29, 2011 read more
FBAR – Extensions, Extensions, Extensions!
FBAR – Extensions, Extensions, Extensions!
Just as I thought that Treasury was done issuing notices extending the FBAR filing deadline for persons with signature authority but no financial interest in foreign accounts, here comes yet another notice.  On June 17, 2011 the Financial Crimes Enforcement Network, or colloquially known as FinCen issued Notice 2011-2.  This is the 3rd signature authority notice that I counted in the last month and the fifth notice since 2009 that extends the filing deadline for some signature authority accounts.  So to recap, the whole extension plethora started with Notice 2009-35, then came Notice...
June 20, 2011 read more
Additional FBAR Relief for Certain Foreign Financial Account Signatories (Notice 2011-54)
Additional FBAR Relief for Certain Foreign Financial Account Signatories (Notice 2011-54)
On June 16, 2011, the IRS, in Notice 2011-54, further extended the deadline from June 30, 2011, to November 1, 2011, for the filing of the Report of Foreign Bank and Financial Accounts (FBAR) for persons with no financial interest in a foreign financial account but with signatory or other authority over such accounts for calendar years 2009 or earlier.  The deadline continues to be June 30, 2011 for calendar year 2010.Notice 2011-54 benefits investment funds and managers that have authority over foreign financial accounts in which such investments fund or managers have no legal or...
June 19, 2011 read more
Boltar v. Commissioner: A Cautionary Tale About Appraisals
Boltar v. Commissioner: A Cautionary Tale About Appraisals
As with sausage and law, most taxpayers and their tax lawyers do not want to see how their valuation expert "made" their appraisal report.  In other words, they generally leave the methodolgy to the experts and focus only on the appraised value that will be used to support their return position.The taxpayer in Boltar LLC v. Commissioner,  136 T.C. No. 14 (April 5, 2011), however, learned the hard way that an appraisal that does not use reliable methods and relies on factual incaccuracies can be as worthless as the paper its printed on.While the appraisal at issue in Boltar was used by...
June 10, 2011 read more
Lending and the 864(b)(2) safe harbor – the industry keeps pushing for guidance but Treasury seems busy with other issues
Lending and the 864(b)(2) safe harbor – the industry keeps pushing for guidance but Treasury seems busy with other issues
Here we are at the time when another guidance priority list is being finalized and the Treasury has requested comments regarding what should go on this list. I am not going to go on and on about this, but it is notable that the Treasury has not budged on this issue. Enough has been written about the safe harbor and its implication to investment funds. Even more has been written about lending and how the safe harbor, may, should, or may not apply to lending type activities by foreign funds. To funds, the stakes are pretty high – no US tax vs. tax on net basis. The question that is on many...
June 07, 2011 read more
In PLR 201111002 the Service Approves an Alternative Method for Basis Recovery in a No-Cap Earnout
In PLR 201111002 the Service Approves an Alternative Method for Basis Recovery in a No-Cap Earnout
Earnouts are very common in private equity and venture capital deals. The fund could be exposed to the earnout as a seller or a buyer of a portfolio company. An earnout is basically a contingent installment sale whereby some future payments depends on the profitability of the portfolio company. If the fund is a seller, one of the threshold questions is whether to report under the Section 453 installment method or whether to elect out of it. Often it is advantageous to report under the installment method.  However, reporting under the method could present certain traps for the unwary such...
May 27, 2011 read more
Retroactive QEF Election Granted in PLR 201120009
Retroactive QEF Election Granted in PLR 201120009
This ruling does not present any new law, but is the most recent one in the retroactive qualified electing fund (QEF) line of authorities, so I decided to use it as a platform to cover the issue on this blog. Investment fund participants ought to be familiar with the passive foreign investment company (PFIC) and QEF rules. These are anti-deferral rules that could cause the investor to have reporting obligations and more importantly, convert capital gains to ordinary income. Like many other Internal Revenue Code provisions, these rules are overly-complex and not always clear or intuitive....
May 25, 2011 read more
District Court Rejects Fund Managers' Attempt to Recharacterize Service Contract as Partnership Relationship
District Court Rejects Fund Managers' Attempt to Recharacterize Service Contract as Partnership Relationship
As may be divined from the site's name, our main goal here is to keep the reader apprised of new developments in the world of taxation that are relevant to the taxation of investment funds and the various fund participants.  Sometimes, the developments take the form of truly new law in the form of IRS regulations or precedential case law; other times, it may be a new case or ruling that simply adds to a larger body of law in an important area.  The opinion of the U.S. District Court for the Southern District of Texas in Rigas v. United States, 107 AFTR 2d 2011-788 (C. D. Tx. 5/2/2011),...
May 13, 2011 read more
FATCA Implementation: Take Two
FATCA Implementation: Take Two
I've posted quite a bit about FATCA on this blog. Among these posts was a FATCA implementation report by Navigant prepared in the aftermath of Notice 2010-60 and sent to me by my colleague Rich Kando. This first report could be found here.  Subsequent to the second round of guidance on FATCA, Notice 2011-34, Navigant, as many other service providers and advisors, prepared an updated implementation report.  Just as with the first report, I think that Navigant has done a pretty good job of making sense out of these Notices, to the extent possible, and of creating some implementation...
May 12, 2011 read more
The Private Equity and Venture Capital Tax Manual
The Private Equity and Venture Capital Tax Manual
This blog post is pretty much a shameless self-promotion of the private equity tax book that I’ve been working on for the last few years. It started with the idea of creating a tool that could help me in working on private equity and venture capital deals. At one point I realized that there are too many tax issues that come up in this field, and that there isn’t one unified source that outlines all the issues and discusses their practical implication. I’ve been working in the field since 2005 (first as a tax clerk at BSF, and then as a tax lawyer) and have been very fortunate to be...
May 12, 2011 read more
TIC Form SLT: Yet another Treasury form befalls the investment fund industry
TIC Form SLT: Yet another Treasury form befalls the investment fund industry
This form comes courtesy of Treasury’s latest effort to ensure more timely and accurate measurement of aggregate holdings of long-term securities.  The concept here is not new. Some investment managers surely are familiar with the TIC reporting.  Treasury International Capital (TIC) already requires monthly data on holdings of short-term securities, on purchases and sales of long-term securities, and annual data on holdings of long-term securities (via the so called TIC S Forms, including Forms S, SHC, SHCA, SHL, and SHLA).  As Treasury explains, now, certain funds, investment managers...
May 11, 2011 read more
May investment managers rely on proposed regulations after the Renkemeyer decision, and does Renkemeyer really matter?
May investment managers rely on proposed regulations after the Renkemeyer decision, and does Renkemeyer really matter?
As many may know, May is the time when the Tax Section of the ABA meets for its semi-annual meeting (usually in DC). Often there are excellent discussions and observations that are worth noting. This one has to do with the Renkemeyer case that Matt covered here when the Tax Court decision first came out.  Apparently, as reported by Shamik Trivedi of TNT, the decision was a topic at the Partnership and LLCs session of the meeting. I did not attend this meeting, but judging by the report, it seems that some practitioners were concerned, and read Renkemeyer to suggest that taxpayers cannot...
May 11, 2011 read more
Worthless Intangibles and Section 197(f)(1)
Worthless Intangibles and Section 197(f)(1)
Recently the IRS released CCA 20111101F where it rejected several arguments raised by the taxpayer that worthless goodwill associated with acquired Section 197 intangibles (in this case franchises) should be deductible under Section 165 of the Code. The facts of the ruling were not too elaborate.  The taxpayer acquired certain assets from an automotive dealer including goodwill related to five different franchise rights. Subsequent to the sale, the taxpayer received notice that two of the franchises were being terminated.  The taxpayer claimed that the goodwill associated with the...
May 01, 2011 read more
Chief Counsel Reasons that IRS can’t Levy on SMLLC Property to Satisfy the Liability of the Owner
Chief Counsel Reasons that IRS can’t Levy on SMLLC Property to Satisfy the Liability of the Owner
In CCA_2011032112062926 Chief Counsel was asked whether it is appropriate to levy on the assets of a single member LLC to satisfy the owner’s tax liability and the answer was No. However, CC also suggested that a reverse piercing veil approach may be appropriate.  Nonetheless, it also acknowledged that the piercing standard is pretty high in most states.  CC further reiterated that the proper approach is to levy on the LLC interest and issue a notice to the LLC for any distributions going to the owner.Why am I talking about this?   Most asset protection planning revolves around...
April 25, 2011 read more
Safe Harbor Provides for 70% deductibility of Success-Based Fees
Safe Harbor Provides for 70% deductibility of Success-Based Fees
Many private equity and venture capital professionals are aware of the general rule that costs incurred to acquire an asset that has a useful life extending beyond the taxable year of acquisition must be capitalized.  Under Treasury Regulations, this general rule extends to fees paid to professionals to "facilitate" acquisitions of whole businesses, as well as various restructurings and reorganizations, which may not result in the acquisition of an asset, but that nevertheless provide significant long-term benefits.  A common example is a fee payable to the fund's investment banking firm...
April 23, 2011 read more
Sollberger v. Commissioner: The Tax Court Continues to Slam Monetization Strategies
Sollberger v. Commissioner: The Tax Court Continues to Slam Monetization Strategies
In a recent decision the Tax Court rejected yet another monetization attempt in the case of Kurt Sollberger v. Commissioner, T.C. Memo. 2011-78 (April 4, 2011).  This seems to shape a Tax Court trend considering that the court held against the taxpayer in the other two monetization cases that were decided last year, Calloway, 135 T.C. No. 3 (July 8, 2010) and Anschutz, 135 T.C. No. 5 (July 22, 2010). I previously reasoned on this blog that the negative result in the Anschutz case seemed to stem from poor execution than anything else.  So what went wrong in the Sollberger case? In this...
April 21, 2011 read more
Notice 2011-34: The Second Round of FATCA Guidance is Released
Notice 2011-34: The Second Round of FATCA Guidance is Released
So, while I was busy with work and finishing up the private equity tax book I’ve been toiling on, Treasury released the second round of FATCA guidance (on a Friday nonetheless).  Here are my observations:The guidance comes in the form of another voluminous notice. It is 46 pages which in addition to the 62 pages of Notice 2010-60 comes to a total of 108. Why do I point that out?  I point this out for several reasons.  First, this in my mind equates to a possible 100-150 page proposed regulation, counting the preamble. It seems paradoxical to me to come up with volumes on top of...
April 16, 2011 read more
Tax Court: Fund Manager Gets Business Bad Debt Treatment for Loan to Advisor
Tax Court: Fund Manager Gets Business Bad Debt Treatment for Loan to Advisor
Fund managers' compensation typically consists of two elements: a management fee--generally 1-2% of NAV (which in addition to paying the managers, is applied toward other operating expenses), and a performance fee--generally 20% of gains.  In addition, fund managers may receive an investment return from any capital they invest into the fund (typically, around 1% of the fund's capital).  The Tax Court's holding in Todd A. Dagres et ux. v. Commissioner; 136 T.C. No. 12 (March 28, 2011), indicates that the relative amouints of these components can be determinative of the issue of whether a...
April 04, 2011 read more
Refunds in Asset Purchase Agreements
Refunds in Asset Purchase Agreements
Recently the Service issued CCA 2010100811334240.  While the ruling does not offer any new law, it is a good reminder of the often ignored practical and legal considerations surrounding tax refunds in acquisition agreements.  In this ruling the parties entered into an asset purchase agreement. The parties thoughtfully addressed tax refunds in the agreement.  The APA clearly listed “tax refunds” as assets sold.   Thus, the parties were one step ahead of a lot of other buyers and sellers who do not address refunds at all and leave the issue in the air altogether.  The parties...
March 23, 2011 read more
Tax Court: LLP Partners Did Not Qualify for Limited Partner Exception to Self-Employment Tax
Tax Court: LLP Partners Did Not Qualify for Limited Partner Exception to Self-Employment Tax
A recent Tax Court opinion held that the "limited partner" exception to liability for self-employment tax ("SET") found in IRC Section 1402(a)(13) did not apply to the partners of a Kansas limited liability partnership, which was operated as a law firm specializing in, you guessed it, Federal income tax law.  The opinion--Renkenmeyer, Cambell & Weaver, LLP v. Commissioner, 136 T.C. No. 7 (February 9, 2011)-- is noteworthy both to interest holders in "newer" entities such as LLPs, LLLPs, and LLCs, and also to old-fashioned limited partners.The prevailing view among practitioners...
March 15, 2011 read more
Penalties and Retainer Letters After the Enactment of Economic Substance
Penalties and Retainer Letters After the Enactment of Economic Substance
As mentioned a few times on this blog, Congress codified the economic substance doctrine last year as part of the Health Care and Education Reconciliation Act of 2010. One of the aspects of the new law is the introduction of a strict liability penalty for engaging in transactions that lack economic substance.  Before the enactment of the doctrine, usually, to avoid the 20% penalty under Sec. 6662 of the Code, funds either relied on “reasonable cause” or on “adequate disclosure.”  However, newly amended Sec. 6662(b)(6) of the Code provides for a 20% penalty for “[a]ny...
March 11, 2011 read more
Pete Stark Reintroduces Last Year's Currency Tax Bill
Pete Stark Reintroduces Last Year's Currency Tax Bill
For those who do not remember, last year Pete Stark, a D- Cal Representative introduced H.R. 5783, the Investing in Our Future Act of 2010. That bill basically provided that currency transactions will be subject to a 0.005 percent tax on the value of the currency acquired in the transaction.  Last year this Bill did not go anywhere.  That did not stop Mr. Stark from reintroducing the Bill in the 112th Congress.  It doesn’t seem that much has changed from the previous installment.  The Bill, if it ever passes, could put a significant tax strain on hedge funds and private equity funds...
March 08, 2011 read more
FATCA and Foreign Funds
FATCA and Foreign Funds
I was reading an article today by Lee Sheppard titled “Danilack Warns Multinationals on FATCA and GRAs.”   In the article, Ms. Sheppard reports on deputy commissioner (international) Michael Danilack’s views on FATCA and raises some questions along the way.  What intrigued me was the question about the holding company rule.  Ms. Sheppard asks “What if private equity funds are making U.S. investments through a foreign holding company?”  Then few more thoughts on Ms. Sheppard’s part follow and the discussion ends with Mr. Danilack’s answer -  “the government does not want...
March 01, 2011 read more
FinCen Finalizes the Proposed FBAR Regs
FinCen Finalizes the Proposed FBAR Regs
So the 31 CFR §103.24 FBAR regulations became final on February 24,2011.  The regulations are effective as of March 28, 2011. I personally had a modicum of hope that the final version would exempt interest in private equity, venture capital and hedge funds as  reportable accounts, but that did not happen.  On this issue, the final regulations basically adopt the proposed regulations. Section 103.24(c)(3)(iv)(B) provides, just as the proposed regulations, that “Other investment fund. [Reserved].”  So in essence, for the time being, it appears that it is in IRS’ hands to resolve...
February 24, 2011 read more
Form 8938 and Others – Headaches for Fund Investors
Form 8938 and Others – Headaches for  Fund Investors
I was reading TNT today and the following jumped at me. It was a comment by Jane A. Bruno about Form 8938, the FBAR and the recently enacted reporting obligations that affect US residents that live and work abroad. The comment had some well reasoned remarks and observations and a pleading tone asking Treasury to discontinue this avalanche of information collection and reporting requirements that could drive taxpayers mad.  The comment reminded me that it is tax season and that many fund investors will be filing their individual tax returns soon.  Well, in the last few years it seems that...
February 16, 2011 read more
The Greenbook for Obama’s 2012 budget was just released
The Greenbook for Obama’s 2012 budget was just released
The Administration just came out with its 2012 budget and as expected, the budget contains, again, a proposal to tax carried interest. The main difference from last year’s proposal is the change from “service partnership interest” (SPI) to “investment services partnership interest” (ISPI). In other words, while last year’s budget aimed at all services profits interest in partnerships, this year’s budget clearly addresses investment partnerships only. Just as last year, the new budget expressly discusses the anti-abuse rule that would subject “disqualified interest” to...
February 15, 2011 read more
The 2011 Offshore Voluntary Disclosure Initiative (OVDI) is Official
The 2011 Offshore Voluntary Disclosure Initiative (OVDI) is Official
I mentioned several times on this blog that a new program was pretty much in the cards. Few days ago the Government went on the record and announced the new OVDI. The IRS issued press release IR-2011-14 (Feb. 8, 2011) which summarizes the highlights of the program and also links to a more detailed Q&A. The press release can be found here and the Q&A could be found here. As suggested by the IRS previously, the new program has stiffer penalty rules. OVDI requires individuals to pay a penalty of 25% of the amount in the foreign bank accounts in the year with the highest aggregate...
February 11, 2011 read more
New Entities Created in Bankruptcy Subject to the Section 7874 Inversion Rules
New Entities Created in Bankruptcy Subject to the Section 7874 Inversion Rules
A few days ago the Office of Chief Counsel (International) released an internal memorandum that addressed the potential application of the inversion rules of Section 7874 in bankruptcy. Section 7874 was enacted in 2004 as another tool to battle expatriation and the avoidance of U.S. tax.  In most basic terms, the section provides that certain expatriated entities (foreign corporations that acquire U.S. corporations or partnerships and which are at least 60% owned by the former owners of the acquired U.S. entity and which do not have substantial business operations in their country of...
February 07, 2011 read more
Obama Proposes to Make Small Business Stock Exclusion Permanent
Obama Proposes to Make Small Business Stock Exclusion Permanent
The Obama administration announced on January 31, 2011 that the President's 2012 budget plan will include a proposal to make permanent the 100% exclusion from tax on capital gains from the sale or exchange of qualified small business stock.   IRC Section 1202(a)(4), added by The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010, which provides for the 100% exclusion, currently applies only to qualified small business stock issued after Dec. 31, 2010, and before Jan. 1, 2012 (IRC Section 1202 provides for a 50% exclusion on capital gains with respect to...
February 02, 2011 read more
VPF with a Short Sale on the Backend is a No Go, Service Says
VPF with a Short Sale on the Backend is a No Go, Service Says
Few days ago Chief Counsel (Financial Institutions & Products) released Written Determination Number: 201104031 (UILC: 9300.99-11).  Basically, the IRS said that you can't unwind a variable prepaid forward (VPF) by delivering borrowed shares and not recognize gain.  A VPF is a prepaid forward with an embedded collar where an owner of the shares pledges the shares to a financial institution in exchange for cash. Because of the collar, and because of the variable delivery of shares when the deal is unwound, the transaction is not treated as a sale from the outset.  In other words, the...
February 01, 2011 read more
New Details on the Upcoming Voluntary Disclosure Program
New Details on the Upcoming Voluntary Disclosure Program
I posted not long ago on this blog that a new voluntary disclosure program is in the cards. It appears that the new program will be officially announced very soon.  Few days ago Kristen A. Parillo had a piece on TNT reporting some of the details of this new program. The views expressed were mainly those of Leslie DeMarco, special agent in charge of the CI's Los Angeles field office.  The article was titled "IRS Official Previews Process for New Offshore Disclosure Program" and could be found on TNT's website, 2011 TNT 18-2.The article covers a lot of points but to me the most interesting...
January 28, 2011 read more
Robucci v. Commissioner - Tax Planning No Good, the Tax Court Says
Robucci v. Commissioner - Tax Planning No Good, the Tax Court Says
Here is a case that the Tax Court published yesterday that applies equally to investment fund related tax planning and any other tax motivated planning taxpayers may engage in. I personally have always viewed the disregarding of corporate entities by the IRS as a tough nut to crack, but in this case they did it quite successfully, and not only that, but they managed a double whammy by hitting the taxpayer with a Section 6662(a) penalty. So what happened in this case? In Robucci v. Commissioner, T.C. Memo. 2011-19, a psychiatrist sought the tax planning advice of an attorney/CPA on how to...
January 25, 2011 read more
Treasury Official: Payments Under Fixed-term Revolvers Likely to Qualify For FATCA Exemption
Treasury Official: Payments Under Fixed-term Revolvers Likely to Qualify For FATCA Exemption
on Friday, January 21, 2011, a Treasury Department official gave his views on the treatment of an important issue under FATCA that affects the PE and VC industries.  According to the Bureau of National Affairs' Daily Tax RealTime service, the official--Itai Grinberg, an attorney-adviser in Treasury's Office of International Tax Counsel--stated that he believed that payment obligations under revolving credit agreements outstanding as of March 18, 2012 would not be subject to FATCA's withholding tax regime, so long as such credit agreements have a finite term.  Based on Mr....
January 24, 2011 read more
Proposed Legislation - Credit for Investments in Small Technology Innovation Companies
Proposed Legislation - Credit for Investments in Small Technology Innovation Companies
Few weeks ago Rep. Rush D. Holt, D-N.J introduced H.R. 133, the Creating Jobs From Innovative Small Businesses Act of 2011.  If this legislation passes, which should not come as a surprise considering Congress's earnest efforts to jumpstart the economy, it would offer an income tax credit of up to $100,000 for investments in small technology innovation companies. The credit will be part of the general business credit and will come as newly enacted Section 45S. The credit will be afforded for qualified equity investments which includes original issue of stock or capital interest in a...
January 24, 2011 read more
PitchBook Issues its Much Anticipated PE Breakdown Report
PitchBook Issues its Much Anticipated PE Breakdown Report
Previewed in this space earlier this month, financial research firm PitchBook released its 2011 Annual Private Equity Breakdown this week.  In sum, the report is a mixed bag.   While the report touts a $50 billion 4Q 2010 PE investment figure (more than 4 times the amount invested in 4Q 2009 and more than 6 times invested in 2Q 2009 at the bottom of the economic downturn), it cautions about a $485 billion capital overhang (the amount of funds raised raised by PE funds that remain uncalled) as well as a portfolio company overhang (PE firms owned an all-time high 5,994 U.S. companies at...
January 20, 2011 read more
Yet Another Upbeat Private Equity Report
Yet Another Upbeat Private Equity Report
BDO, one of the largest tax, accounting and consulting companies in the country, released on January 12, 2011 a report titled Private Equity Fund Managers are Expecting a Bigger and Better 2011. For this survey BDO reached out to over 100 senior executives at U.S. PE firms.  The key theme of the survey is that 2010 was better than the last few years and that managers are very upbeat for year 2011, i.e. they expect to close a lot more new deals.  What is somewhat astonishing about the survey is that 69 percent of the managers are actually expecting that deal flow will surpass the 2007...
January 18, 2011 read more
NY City Bar Requests Guidance Regarding Publicly Traded Partnerships
NY City Bar Requests Guidance Regarding Publicly Traded Partnerships
On January 10, 2011 the NY City Bar issued a report and request for guidance regarding publicly traded partnerships (PTPs). Most funds do not fall within the category of PTPs but some do. To name a few fund/PTPs - Fortress Investment Group (FIG), The Blackstone Group (BX) and KKR Financial Holdings LLC (KFN). Under Code Section 7704, PTPs are taxed as corporations unless they qualify for some of the safe harbors enumerated in that section. Most funds rely on the so called "90-10 safe harbor."  Under this safe harbor a PTP is not treated as a corporation if 90% of its income is qualifying...
January 17, 2011 read more
No Peace for Noncompensatory Partnership Options
No Peace for Noncompensatory Partnership Options
I opened TNT today and what do I see - a piece by Monte Jackel titled Reprise of the Noncompensatory Option Regs. 2011 TNT 7-7.  So in essence, in this article, Mr. Jackel disagrees with major components of the noncompensatory partnership options regulations. Honestly, I did not read the whole article, although I am sure, as always Monte’s analysis is comprehensive and thoughtful. To me, the import of this was more in the vain, “Oh, here we go again.” To those that are not aware, the noncompensatory proposed regulations have been proposed since 2003.  The fact that a regulation has...
January 11, 2011 read more
NYSBA Issues Report No. 1228 on Codification of the Economic Substance Doctrine
NYSBA Issues Report No. 1228 on Codification of the Economic Substance Doctrine
I personally find most of the NYSBA reports to be very comprehensive and informative.  This report does not differ in this respect.  The report addresses the codification of economic substance, an issue that has been talked about in length, and rightfully so.  I recently wrote a separate piece on Notice 2010-62, the first eagerly awaited Treasury guidance on the issue.  As I mentioned in that note, economic substance has an universal tax implication that is not limited only to the tax exposure of private equity, venture capital and hedge fund.  As to funds, the report highlights...
January 07, 2011 read more
Defining “Publicly Traded” for Sec. 1273 Purposes – Proposed Regulations Shed New Light
Defining “Publicly Traded” for Sec. 1273 Purposes – Proposed Regulations Shed New Light
In Federal Register Volume 76, Number 5 (Friday, January 7, 2011) Treasury issued Proposed Regulation 1.1273-2(f) (REG-131947-10).  The regulation changes the definition of “publicly traded” for purposes of determining “Issue Price” under Sec. 1273 of the Code. The determination of “Issue Price” has various tax implications on both private equity and hedge funds. It is common practice for funds to invest in various types of debt, both publicly and privately held.  Moreover, once the debt is purchased by the fund, it is often modified. Typically, if the modification is...
January 07, 2011 read more
FATCA Implementation
FATCA Implementation
FATCA has been an extremely popular topic among U.S. tax practitioners.  Unfortunately, however, many foreign financial institutions (FFI) seem to be oblivious to the long arm of FATCA and have not started to prepare for FATCA implementation by introducing procedures for complying with this new legislation.  A colleague of mine, Richard Kando from Navigant Consulting, Inc sent me a FATCA whitepaper that deals with creating internal procedures for FATCA implementation.  As the paper notes, the process could be mindboggling and despite the January 1st, 2013 effective date, FFIs should...
January 06, 2011 read more
Tax Reform Talk - Continued
Tax Reform Talk - Continued
Just one day after we posted about the increased chatter about the need for a tax reform and its allegedly impending inclusion in Obama's 2012 budget, the National Taxpayer Advocate released its annual report to Congress. The key issue and the number one priority in tax administration identified in the report is the need for a tax reform.  The report goes on emphatically to proclaim that "The Time for Tax Reform is Now."  The key culprits leading to this desperate need for a change hardly come as a shocker. The report lists "the complexity of the tax code as the most serious problem...
January 06, 2011 read more
Tax Reform Talk
Tax Reform Talk
Today there was a good piece on Tax Notes on the topic of tax reform.  This particular topic is near and dear to my heart.  The piece was titled "Republicans Expect to See Tax Reform in Obama's 2012 Budget" and could be found at www.taxanalysts.com. In essence the short article points out that Republicans expect to see some form of tax reform proposal in Obama's fiscal year 2012 budget. The article goes on to quote Congressman Steny H. Hoyer (MD-5) saying that "[t]he tax code is inefficient, cumbersome, complicated, costly for Americans and American business."  This is surely one way...
January 05, 2011 read more
How did Private Equity do in 2010?
How did Private Equity do in 2010?
PitchBook is in the process of rolling out its annual private equity deal numbers and on Monday they posted a short preview of its upcoming Annual Private Equity Breakdown 2011 report which will be released next week.  The authors of this blog, just as many other tax professionals, are looking for an uptick in private equity business, and the preliminary numbers seem to suggest that such an uptick is in place.  According to Pitchbook business in 2010 was up compared to 2009 but nowhere near close to the 2005-2007 years. Year 2010 however showed a moderate use of leverage, which is...
January 04, 2011 read more
Private Equity Freeze Starts to Thaw
Private Equity Freeze Starts to Thaw
While this post entry is not exactly related to private equity, venture capital or hedge fund taxation, the state of the market ought to be of interest to anybody that has an exposure to the fund business.  We constantly follow reports by Pitch Book and Preqin to gain some insight into current industry trends.  Pitch Book reports today that there is a renewed appetite among private equity funds for large deal exposure. According to Pitch Book, in 2010 the number of + $500 million investments have more than doubled for a total of 68 deals worth $77.6 billion. The story could be found at...
December 28, 2010 read more
Treaty Override Provision Dropped from 9/11 Bill
Treaty Override Provision Dropped from 9/11 Bill
New York Senators Charles Schumer (D-N.Y.) and Kirsten Gillibrand (D-N.Y.) on December 21, 2010, announced the removal of a controversial provision from H.R. 847, the James Zadroga 9/11 Health and Compensation Act of 2010, which would have denied treaty benefits for certain deductible related-party payments. Under the provision, a foreign company operating in a treaty jurisdiction would be precluded from claiming treaty benefits with respect to deductible payments received from a related U.S. company if the foreign company is a subsidiary of a corporation based in a third country...
December 22, 2010 read more
Congress Extends Bush Tax-Cuts
Congress Extends Bush Tax-Cuts
After a prolonged and highly publicized debate between Democrats and Republicans, on Friday December 17th the President signed The Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010.  The law is colloquially known as the Bush Tax-Cuts Extender.  Needless to say, the passage of this law was eagerly anticipated by both limited partners and managers of all sorts of funds. The two key provisions that impact funds and their partners are the 2 year extension of the 15% rate for qualified dividends and the 15% rate for long term capital gains. This law, in...
December 18, 2010 read more
Another Special Offshore Voluntary Disclosure Program in the Cards
Another Special Offshore Voluntary Disclosure Program in the Cards
By now everybody has heard of the UBS case and the crackdown on offshore tax evasion.  The case was part of an orchestrated effort by the IRS to put a stop on hiding money offshore.  As part of this effort the IRS introduced the Special Voluntary Disclosure Program which brought in approximately 15,000 disclosures from individuals holding foreign accounts.  Many U.S. investors who have been less than forthcoming regarding their offshore holdings, including accounts in foreign private equity and hedge funds, took advantage of this program.  However, the program closed in 2009.  Since...
December 12, 2010 read more
New Guidance on Economic Substance
New Guidance on Economic Substance
As many know, year 2010 was a very notable year when it comes to the economic substance doctrine.  After several years, finally Congress enacted new Section 7701(o) as part of the Health Care and Education Reconciliation Act of 2010, and thus finally codified the long standing doctrine that emanated from Gregory v. Helvering many years ago. On its face, the enactment seemed simplistic enough, but it left practitioners with too many questions.  In an attempt to address some of these questions, the IRS issued Notice 2010-62 on December 4th, 2010.  The guidance addresses four principal...
December 07, 2010 read more
Personal Goodwill Developments
Personal Goodwill Developments
Ever since the Martin Ice Cream case, personal goodwill has been the sweet spot of disposing a business.  The disposition of personal goodwill is generally taxed at capital gains rates of 15% and as long as there continues to be an arbitrage between capital and ordinary rates, taxpayers will likely persist in attempting to fall within the personal goodwill cubby hole.  In the fund context the issue usually arises for fund managers in the estate planning and divorce context, or at the fund level if the fund is on the buy side and a founder is trying to sell all or a portion of its business...
October 19, 2010 read more
Series LLC - Prop. Reg. 301.7701-1(a)(5)
Series LLC - Prop. Reg. 301.7701-1(a)(5)
Series LLC, a relatively new structure, is available to U.S. funds who are seeking flexibility.  This form was first introduced in Delaware and later was adopted by several other states including Illinois.  The key highlight of the structure is that for state law purposes the LLC is a single entity, while for federal income tax law, each series of the LLC, purportedly, is treated as a separate entity.  The apparent advantage of this set up is flexibility and reduction of organization and administrative cost.  Separate series could be established for each portfolio company or each class...
September 20, 2010 read more
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