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Treasury Department and IRS Release Proposed Regulations on Management Fee Waivers

On July 22, 2015, the Treasury Department and the IRS released proposed regulations regarding fee-waiver arrangements commonly used by private investment funds. If finalized, the new rules would recharacterize certain partnership interests received in connection with fee waivers (“waived-fee interests”) as disguised compensation arrangements that result in ordinary income. In preamble language, the government also states that an existing administrative safe harbor treating certain grants of “profits interests” as nontaxable events will be interpreted and revised to exclude waived-fee interests. As a result, even if a waived-fee interest is not deemed to be a disguised compensation arrangement, the government may take the position that it is taxable on receipt. Continue

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