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May investment managers rely on proposed regulations after the Renkemeyer decision, and does Renkemeyer really matter?
May 11, 2011
Miscellaneous
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 safely rely on proposed regulations (in this particular instance, the 1402 proposed regulations).   If I were to guess what prompted this concern, I would say that the reason was that the Tax Court did not rely on the limited partner definition of the proposed regulations in conducting its analysis.

 I am not sure whether the Tax Court’s analysis was that unusual. Generally proposed regulations do not have precedential or persuasive value and are merely considered as any other argument by the courts. On the other hand, however, at least per my understanding, it has been the Service’s long standing position that taxpayers can rely on proposed regulations and that examiners should follow such regulations.  As it may be the case, as reported by TNT, the issue has come up at the meeting and in an unofficial statement by Dianna Miosi, special counsel, IRS Office of Associate Chief Counsel (Passthroughs and Special Industries) has resolved any misconceptions to the effect that taxpayers can, and should, rely on the regulations. Does all of this impact private equity, venture capital and hedge fund managers?  As we pointed out in our original post, the self-employment tax issue that came up in Renkemeyer does not come up that often in the investment fund context because managers would usually rely on the IRC Section 1402(a)(3)(A) exception from self-employment tax. However, for investment managers who are compensated by a distributive share in service fees, the issue may still come up.  In those instances, it appears that regardless the Renkemeyer decision, investment managers can still look to the proposed regulations in ascertaining whether they will be viewed as limited partners, and whether they should be subject to self-employment tax.  Notably, those proposed regulations expressly carve out from the definition of a limited partner all partners that provide more than de minimis services to a service partnership, which also seems to be the gist of the Renkemeyer decision.  For what is worth, my view at least is that for such managers, the outcome under both the Renkemeyer decision and the proposed regulations ought to be the same, i.e. self employment tax on any distributive share of the service fee.
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Tags: 1402(a)(13), 1402(a)(2), 1402(a)(3), Renkemeyer, self employment tax