Proposed IRS Regulations Target Private Equity Management Fee Waiver Arrangements
On July 22, 2015, the Internal Revenue Service (“IRS”) and Treasury Department released proposed regulations regarding disguised payments for services under section 707(a)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”). The proposed regulations, if finalized, could treat participants in common private equity fund management fee waiver arrangements as receiving compensatory payments for services rather than allocations of the fund partnership’s underlying income. The preamble to the proposed regulations also describes certain modifications to existing IRS safe harbors relating to the issuance of partnership profits interests. The regulations are proposed to be effective on the publication date of the final regulations. However, in the preamble to the proposed regulations, the IRS states its position that the regulations generally reflect Congressional intent with respect to existing law.