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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
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
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
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
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
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
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 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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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
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