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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 As a background, Congress repealed TEFRA and replaced it with the Bipartisan Budget Act of 2015 (BBA).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
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 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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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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