Articles By Topic
By Topic: Tax
-
From Vol. 6 No.11 (Mar. 14, 2013)
What Critical Issues Must Hedge Fund Managers Understand to Inform Their Preparation of Schedules K-1 for Distribution to Their Investors?
Most hedge funds are taxed as partnerships and therefore pass through items of income, gains and losses to their fund investors, rather than facing taxation on such items at the partnership level. As a result, hedge fund managers are responsible for preparing and distributing to their investors a Schedule K-1 to Form 1065, which shows an investor’s share of a fund’s income, gains, losses, credits and other items for each tax year that must be reported to the Internal Revenue Service on the investor’s individual income tax return. Nonetheless, preparation of this schedule can present a litany of challenges which can confound many hedge fund managers. Moreover, preparation of K-1s cannot be entirely outsourced to an accounting firm; a manager must understand what the accounting firm is doing and be able to evaluate its work. Recognizing the complexity and importance of this topic, a recent webinar provided a top-level refresher course on the tax considerations that influence the structuring of hedge funds and addressed numerous issues involved in the preparation of Schedule K-1, such as the difference between “trader funds” and “investor funds,” and allocation and adjustment rules that have tax consequences for hedge fund investors. This article summarizes key takeaways from that program.
Read Full Article … -
From Vol. 6 No.11 (Mar. 14, 2013)
U.K. Tax Tribunal Overturns Hedge Fund Manager’s Attempt to Avoid Tax on Hedge Fund Profits through the Acquisition and Disposition of Film Distribution Rights
On February 13, 2013, a U.K. tax tribunal (Tribunal) overturned a tax avoidance scheme in which a prominent hedge fund manager attempted to create artificial losses through the acquisition and disposition of film distribution rights to shelter millions of pounds in personal income generated from his hedge fund. This case is the latest victory for Her Majesty’s Revenue and Customs in its recent vigorous enforcement against aggressive tax avoidance schemes by hedge fund managers. See “U.K. Hedge Fund Manager Taxed on Bonuses Delivered Through Tax-Avoidance Scheme,” The Hedge Fund Law Report, Vol. 5, No. 34 (Sep. 6, 2012). This article summarizes the Tribunal’s factual findings and legal analysis in this case.
Read Full Article … -
From Vol. 6 No.7 (Feb. 14, 2013)
FATCA Implementation Summit Identifies Best Practices Relating to FATCA Reporting, Due Diligence, Withholding, Operations, Compliance and Technology
On December 6, 2012, the Hedge Fund Business Operations Association and Financial Research Associates, LLC jointly sponsored a “FATCA Implementation Summit” in New York City (Summit). Participants at the Summit discussed compliance requirements, recommendations and strategies in connection with the Foreign Account Tax Compliance Act (FATCA), in particular with respect to registration, reporting, due diligence and withholding. Participants also addressed the operational and technological demands presented by FATCA, and best practices for meeting those demands. This article summarizes the practical takeaways from the Summit and offers recommendations that hedge fund managers can apply directly to their FATCA compliance programs.
Read Full Article … -
From Vol. 6 No.5 (Feb. 1, 2013)
What Impact Will FATCA Have on Offshore Hedge Funds and How Should Such Funds Prepare for FATCA Compliance?
The Foreign Account Tax Compliance Act (FATCA) will begin to impact the offshore investment fund industry in 2013, requiring a “foreign financial institution” (FFI) to enter into an agreement with the Internal Revenue Service (IRS) and disclose certain information regarding its U.S. account holders on an annual basis. FFIs are broadly defined to include offshore hedge funds or other offshore private investment funds, and compliance with FATCA may be difficult for many of these funds. The principal goal of FATCA is to prevent U.S. taxpayers from using foreign accounts and investments to hide income from the IRS and evade payment of U.S. tax. As the penalties for failure to comply with FATCA are harsh – including the imposition of a 30 percent withholding tax on certain U.S. source payments – managers of offshore hedge funds should begin to prepare for FATCA and its due diligence reporting requirements. On January 17, 2013, the IRS issued long-awaited final regulations under FATCA, clarifying many of the items left open by the proposed regulations released in February of 2012 and previously issued IRS guidance. In a guest article, Michele Gibbs Itri, a partner at Tannenbaum Helpern Syracuse & Hirschtritt, LLP, discusses the impact that current FATCA rules will have on offshore investment funds and describes the steps that fund managers can take now to comply with these rules to avoid any FATCA tax on the funds’ U.S. investments.
Read Full Article … -
From Vol. 5 No.43 (Nov. 15, 2012)
Understanding the Benefits and Uses of Series LLCs for Hedge Fund Managers
Hedge fund managers are continually striving to maximize the advantages available through their choice of legal entity for structuring their funds and management companies. The series limited liability company (Series LLC) offers a relatively new variation on the traditional limited liability company structure that provides not only liability protection for members vis-à-vis non-members, but also liability protection for members of a given series of interests within the Series LLC vis-à-vis members of other series of interests within the same Series LLC. In a guest article, Yehuda M. Braunstein, a Partner at Sadis & Goldberg LLP, and Todd K. Warren, Of Counsel at Sadis & Goldberg LLP, discuss: the history and evolution of the Series LLC; the various structural requirements and issues to be considered; the advantages and challenges that are presented by the Series LLC; practical tips regarding how to utilize the Series LLC; and potential uses of the structure by hedge fund managers.
Read Full Article … -
From Vol. 5 No.40 (Oct. 18, 2012)
Tax Efficient Hedge Fund Structuring in Anticipation of the New 3.8% Surtax on Net Investment Income and Proposals to Limit Individuals’ Tax Deductions
In the current political environment, high income U.S. persons are likely to see their income tax rates on investment income rise and their ability to deduct investment-related expenses further curtailed. Consequently, such investors and their advisors are likely to become more concerned about the difference between pre-tax and after-tax returns from competing investment alternatives. It is generally known that hedge funds are somewhat tax-inefficient investments for U.S. high income individual investors. Some funds often employ trading strategies that generate attractive pre-tax returns, but often generate income taxed at the highest rates. Although the mutual fund industry has rolled out many new funds for the general public that are marketed as “tax managed” or “tax efficient” funds, the same trend has not been as evident in the hedge fund world. This fact is a bit unusual since, as discussed in this article, individual investors in hedge funds organized as tax partnerships face a much greater risk of tax inefficiency than investors that invest in shares of corporations that are mutual funds (regulated investment companies under the Internal Revenue Code). Given the increasing competition for assets under management as well as the factors described above, hedge fund managers should engage in tax planning throughout the tax year to make their funds more tax-efficient and should consult with their tax advisors with respect to the tax changes which will surely come in the future. In some cases, fund managers should reconsider the structures of their funds that are available to such U.S. individual investors. In a guest article, A.J. Alex Gelinas, a tax partner at Sadis & Goldberg LLP, analyses tax changes relevant to hedge fund managers and investors that are about to go into effect, or that are likely to go into effect in the future as Congress faces the need to increase tax revenues, and the effect such tax law changes may have on the marketing of hedge funds to U.S. high income individuals. The article provides concrete tax structuring suggestions and also serves as a comprehensive overview of fundamental principles of tax structuring for hedge funds.
Read Full Article … -
From Vol. 5 No.35 (Sep. 13, 2012)
AIMA Canada Handbook Provides Roadmap for Hedge Fund Managers Doing Business in Canada
Pershing Square’s successful proxy contest for control of Canadian Pacific Railway is the most prominent recent example, but by no means the only example, of the increasing importance of Canada for hedge fund managers. See also “Ontario Securities Commission Sanctions Hedge Fund Manager Sextant Capital Management and its Principal for Breach of Fiduciary Duty,” The Hedge Fund Law Report, Vol. 5, No. 24 (Jun. 14, 2012). Specifically, Canada is growing in importance as a place where hedge fund managers may invest, raise capital and recruit talent. In an effort to assist hedge fund managers in navigating the Canadian tax and regulatory landscape, AIMA Canada, a chapter of the Alternative Investment Management Association (AIMA), recently published the AIMA Canada Handbook (Handbook). This article summarizes the key topics covered in the Handbook, including a background discussion of the Canadian securities industry; registration requirements for fund managers operating in Canada; regulations applicable to registrants; exemptions from fund manager registration; tax consequences for hedge funds and investors; structuring Canadian hedge funds; and the outlook for the Canadian hedge fund industry, including an update on the capital raising environment.
Read Full Article … -
From Vol. 5 No.34 (Sep. 6, 2012)
U.K. Hedge Fund Manager Taxed on Bonuses Delivered Through Tax-Avoidance Scheme
On July 16, 2012, the First-Tier Tribunal of the U.K. Tax Chamber issued a decision rejecting an appeal by hedge fund manager Sloane Robinson Investment Services Limited of a tax imposed on bonuses it delivered to its director-employees through a tax avoidance scheme. This article summarizes the decision, including the factual findings, the parties’ arguments and the Tribunal’s legal analysis. This article also provides insight on what the decision means for tax and compensation structuring for U.K. hedge fund managers.
Read Full Article … -
From Vol. 5 No.32 (Aug. 16, 2012)
Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part Two of Two)
Over the past several years, U.S. investors have broadened their alternative investment horizons by exploring investment opportunities with Asia-based fund managers. Asia-based fund managers provide a unique perspective on alternatives which translates to differing investment strategies that appeal to U.S. investors seeking uncorrelated returns or “alpha.” Nonetheless, Asia-based fund managers that seek to attract U.S. investor capital must recognize the intricate regulations that govern investment manager and fund operations in the U.S. and other jurisdictions, such as the Cayman Islands where many funds are organized to attract U.S. investors. This is the second article in a two-part series designed to help Asia-based fund managers navigate the challenges of structuring and operating funds to appeal to U.S. investors. The authors of this article series are: Peter Bilfield, a partner at Shipman & Goodwin LLP; Todd Doyle, senior tax associate at Shipman & Goodwin LLP; Michael Padarin, a partner at Walkers; and Lu Yueh Leong, a partner at Rajah & Tann LLP. This article describes in detail a number of the key U.S. tax, regulatory and other considerations that Asia-based fund managers are concerned with or should consider when soliciting U.S. taxable and U.S. tax-exempt investors. The first article described the preferred Cayman hedge fund structures utilized by Asia-based fund managers, the management entity structures, Cayman Islands regulations of hedge funds and their managers and regulatory considerations for Singapore-based hedge fund managers. See “Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two),” The Hedge Fund Law Report, Vol. 5, No. 31 (Aug. 9, 2012).
Read Full Article … -
From Vol. 5 No.31 (Aug. 9, 2012)
Structuring, Regulatory and Tax Guidance for Asia-Based Hedge Fund Managers Seeking to Raise Capital from U.S. Investors (Part One of Two)
U.S. hedge fund investors are continuously seeking attractive investment opportunities and are increasingly expanding their search to incorporate Asia-based hedge fund managers. At the same time, Asia-based hedge fund managers are navigating the challenging capital raising environment by reaching beyond their borders to attract U.S. investors. However, Asia-based fund managers seeking to attract capital from U.S. investors must contend with a plethora of U.S. and foreign regulations in raising and managing such capital. As such, Asia-based fund managers must work closely with U.S., Cayman and local counsel to develop a cohesive and carefully thought out fund and management structure, intertwining the various regulatory requirements of the applicable jurisdictions, all of which must be adhered to by the fund manager, any sub-advisers and their respective affiliates. This is the first in a two-part series of guest articles designed to help Asia-based fund managers navigate the challenges of structuring and operating funds to appeal to U.S. fund investors. The authors of this article series are: Peter Bilfield, a partner at Shipman & Goodwin LLP; Todd Doyle, senior tax associate at Shipman & Goodwin LLP; Michael Padarin, a partner at Walkers; and Lu Yueh Leong, a partner at Rajah & Tann LLP. This first article describes the preferred Cayman hedge fund structures utilized by Asia-based fund managers, the management entity structures, Cayman Islands regulations of hedge funds and their managers and regulatory considerations for Singapore-based hedge fund managers. The second article in the series will detail a number of the key U.S. tax, regulatory and other considerations that Asia-based fund managers should consider when soliciting U.S. taxable and U.S. tax-exempt investors.
Read Full Article … -
From Vol. 5 No.29 (Jul. 26, 2012)
The Nuts and Bolts of FATCA Compliance: An Interview with James Wall of J.H. Cohn Concerning Due Diligence, Document Collection, Reporting and Other Operational Challenges
The Foreign Account Tax Compliance Act (FATCA) has that unfortunate combination of qualities that strikes fear into the hearts of hedge fund managers and investors: ambiguity and significant penalties. FATCA is set to become effective as of January 1, 2013, but final rules have not yet been promulgated by the U.S. Department of the Treasury. At the same time, sizable financial penalties can be imposed for noncompliance. Accordingly, the hedge fund industry is paying close attention to FATCA developments. Given the serious ramifications of non-compliance with FATCA and the significant uncertainty regarding the details of final regulations, The Hedge Fund Law Report conducted an interview with James K. Wall, a Principal and International Tax Director at J.H. Cohn LLP, concerning FATCA and its implications for hedge fund managers and investors. Our interview with Wall covered various topics, including key questions hedge fund managers still face relating to FATCA compliance; due diligence and compliance measures that hedge fund managers must take; operational challenges in becoming FATCA compliant; whether the hedge fund or the manager should be responsible for bearing costs and expenses in connection with FATCA compliance; dealing with recalcitrant investors; policies and procedures that hedge fund managers should consider adopting for FATCA compliance; what to communicate to fund investors about FATCA; and whether fund governing documents must be amended to include FATCA-related provisions. This article contains the transcript of our interview with Wall. See also “U.S. Releases Helpful FATCA Guidance, But the Law Still Remains,” The Hedge Fund Law Report, Vol. 5, No. 10 (Mar. 8, 2012).
Read Full Article … -
From Vol. 5 No.26 (Jun. 28, 2012)
Hedge Funds and Managers Must File Foreign Bank Account Reports by June 30, 2012
Every U.S. person or entity that had either a financial interest in, or signatory authority or other authority over, a financial account in a foreign country must file Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts), commonly referred to as an “FBAR,” if the aggregate value of such account(s) exceeded USD $10,000 at any time during calendar year 2011. In a guest article, Joseph Pacello, a tax principal at Rothstein Kass, and Deirdre Joyce, a senior international tax manager at Rothstein Kass, discuss, with respect to FBAR filings: imminent filing deadlines; key definitions; notable changes for 2010 and subsequent year reporting; FBAR constructive ownership rules; significant penalties for failure to file; the 2012 offshore voluntary disclosure program; six specific examples of FBAR reporting requirements; and filing instructions. The article concludes with a chart comparing Form 8938 and FBAR filing requirements.
Read Full Article … -
From Vol. 5 No.25 (Jun. 21, 2012)
European Court of Justice Invalidates French Withholding Tax that Applied Only to Dividends Paid to Non-Resident Open-End Investment Funds
One of the fundamental goals of the European Union (EU) is to reduce barriers to economic activity between and among member states. Barriers can include tax policies designed to advantage certain member states over other member states. In that vein, the European Court of Justice (ECJ) recently considered whether France’s policy of imposing a 25% withholding tax on dividends payable by French companies to non-resident investment funds while exempting resident investment funds from withholding violates Article 63 of the Treaty on the Functioning of the European Union and thus creates an impermissible barrier to economic activity among member states. This article summarizes the background and the ECJ’s analysis in this case. The petitioners in the case are global investment managers that manage funds organized as Undertakings for Collective Investment in Transferable Securities (UCITS). Thus, the ECJ’s analysis is directly relevant to UCITS managers, and it is also relevant to managers of non-UCITS investment vehicles with any nexus to Europe.
Read Full Article … -
From Vol. 5 No.13 (Mar. 29, 2012)
Managing Risk in a Changing Environment: An Interview with Proskauer Partner Christopher Wells on Hedge Fund Governance, Liquidity Management, Transparency, Tax and Risk Management
The Hedge Fund Law Report recently interviewed Christopher M. Wells, a Partner at Proskauer Rose LLP and head of the firm’s Hedge Funds Group. Wells has decades of experience advising hedge funds and their managers, and a broad-based practice that touches on substantially every aspect of the hedge fund business. Our interview with Wells was similarly wide-ranging, covering topics including: hedge fund governance; investor demands for heightened transparency; co-investment opportunities; liquidity management issues; side pocketing policies and procedures; holdbacks of redemption proceeds; tax issues, including preparations for compliance with the Foreign Account Tax Compliance Act (FATCA) and the electronic delivery of Schedules K-1; and risk management, including practical steps to prevent style drift and unauthorized trading. This interview was conducted in conjunction with the Regulatory Compliance Association’s Spring 2012 Regulation & Risk Thought Leadership Symposium. That Symposium will be held on April 16, 2012 at the Pierre Hotel in New York. For more information, click here. To register, click here. (Subscribers to The Hedge Fund Law Report are eligible for discounted registration.) Wells is expected to participate in a session at that Symposium focusing on hedge fund governance and related issues.
Read Full Article … -
From Vol. 5 No.12 (Mar. 22, 2012)
IRS Introduces New Disclosure, Consent and Notice Procedures to Govern the Electronic Delivery of 2011 Schedules K-1 by Partnerships, Including Many Hedge Funds and Hedge Fund Managers
On February 13, 2012, the Internal Revenue Service (IRS) issued new procedures for partnerships to provide Schedules K-1 to their partners electronically. Among other things, the new procedures introduce rigorous consent and disclosure procedures that govern the electronic delivery of Schedules K-1 by partnerships, including limited partnerships, such as many hedge funds and hedge fund managers. As such, hedge funds and hedge fund managers that wish to provide electronic delivery of their Schedules K-1 to fund investors or partners in the management company, respectively, should promptly and carefully evaluate the new procedures and their potential impact on the processes they are currently following to obtain consent to electronic delivery of such Schedules K-1. In a guest article, Roger Wise and Kenneth Wear, Partner and Associate, respectively, at K&L Gates LLP, discuss the mechanics and implications of the new K-1 procedures.
Read Full Article … -
From Vol. 5 No.10 (Mar. 8, 2012)
U.S. Releases Helpful FATCA Guidance, But the Law Still Remains
The United States announced an unprecedented multi-country agreement and published detailed proposed regulations addressing implementation of the Foreign Account Tax Compliance Act (FATCA) on February 8, 2012. In a guest article, Michael Hirschfeld, a Partner at Dechert LLP, explains the details of the agreement and proposed regulations and their impact on hedge fund managers.
Read Full Article … -
From Vol. 5 No.5 (Feb. 2, 2012)
How Safe Is It to Ignore Foreign Tax Claims or Judgments Against Cayman Islands Hedge Funds in the Context of a Winding Up of the Fund?
Cayman Islands hedge funds are subject to no Cayman Islands tax of any nature, but they may become liable to foreign tax claims – for example through trading swaps – or they may become subject to judgments for tax imposed against them in other jurisdictions. How should such claims and judgments be regarded by liquidators in the context of winding up the fund, whether in a liquidation imposed by the court, or in a voluntary liquidation? Must effect be given to such claims or judgments, or can such claims and judgments simply be ignored, and the winding up completed without regard to them? Or should the winding up only be completed once the tax claim or judgment has been abandoned by the foreign tax authority, or only with Cayman court sanction that the claim or judgment be disregarded for the purposes of the winding up? In a guest article, Christopher Russell, Partner and head of the litigation and insolvency department of Ogier, Cayman Islands, and Shaun Folpp, a Managing Associate in the litigation and insolvency department of Ogier, Cayman Islands, address these and related questions.
Read Full Article … -
From Vol. 5 No.2 (Jan. 12, 2012)
Proposed New York City Audit Position Can Increase the Amount of Unincorporated Business Tax Paid by New York Hedge Fund Managers
Facing budget deficits and rising debt levels, federal, state and local government authorities have ratcheted up efforts to raise revenues, and one of the constituencies in their crosshairs has been hedge fund managers. While proposals have been put forward at the federal and state level to raise revenues by taxing the carried interest received by hedge fund managers at ordinary income tax levels instead of at the favored long-term capital gains rates, New York City has seemingly opted for another approach by proposing to disallow some expense deductions claimed by hedge fund management entities that are subject to the New York City unincorporated business tax (UBT). Specifically, the New York City Department of Finance (Department of Finance) has recently asserted a new proposed audit position (Proposed Audit Position) to require that a portion of the expenses of an investment manager entity be reallocated to a general partner entity because it believes that certain of those expenses are incurred in generating the incentive allocation received by the general partner entity. This feature-length article begins by explaining in detail the UBT and what entities are subject to the UBT. The article then explains how the UBT applies to hedge fund managers. The article then moves to a discussion of the Proposed Audit Position, including a discussion of the potential application of the Proposed Audit Position to future audits. Next, the article explains how audit positions are promulgated and identifies the sources of authority for the Department of Finance’s assertion of the Proposed Audit Position. The article continues with a discussion how hedge fund managers can respond if the Department of Finance asserts the Proposed Audit Position in disallowing certain investment manager expenses during the course of an audit. The article closes with a discussion of recommended courses of action for hedge fund managers that seek to mitigate the adverse tax impact of the Proposed Audit Position on their businesses.
Read Full Article … -
From Vol. 5 No.1 (Jan. 5, 2012)
Legal and Operational Due Diligence Best Practices for Hedge Fund Investors
In the wake of the financial crisis in late 2008, many investors were left trapped in suspended, gated or otherwise illiquid hedge funds. Unfortunately, for many investors who had historically taken a passive role with respect to their hedge fund investments, it took a painful lesson to learn that control over fundamental fund decisions was in the hands of hedge fund managers. Decisions such as the power to suspend or side pocket holdings were vested in managers either directly or through their influence over the board of directors of the fund. In these situations, which were not uncommon, leaving control in the hands of the manager rather than a more independent board gave rise to a conflict of interest. Managers were in some cases perceived to be acting in their own self-interest at the expense, literally and figuratively, of the fund and, consequently, the investors. The lessons from the financial crisis of 2008 reinforced the view that successful hedge fund investing requires investors to approach the manager selection process with a number of considerations in mind, including investment, risk, operational and legal considerations. Ideally, a hedge fund investment opportunity will be structured to sufficiently protect the investor’s rights (i.e., appropriate controls and safeguards) while providing an operating environment designed to maximize investment returns. Striking such a balance can be challenging, but as many investors learned during the financial crisis, it is a critical element of any successful hedge fund program. The focus on hedge fund governance issues has intensified in the wake of the financial crisis, with buzz words such as “managed accounts,” “independent directors,” “tri-party custody solutions” and “transparency” now dominating the discourse. Indeed, investor efforts to improve corporate governance and control have resulted in an altering of the old “take it or leave it” type of hedge fund documents, which have become more accommodative towards investors. In short, in recent years investors have become more likely to negotiate with managers, and such negotiations have been more successful on average. In a guest article, Charles Nightingale, a Legal and Regulatory Counsel for Pacific Alternative Asset Management Company, LLC (PAAMCO), and Marc Towers, a Director in PAAMCO’s Investment Operations Group, identify nine areas on which institutional investors should focus in the course of due diligence. Within each area, Nightingale and Towers drill down on specific issues that hedge fund investors should address, questions that investors should ask and red flags of which investors should be aware. The article is based not in theory, but in the authors’ on-the-ground experience conducting legal and operational due diligence on a wide range of hedge fund managers – across strategies, geographies and AUM sizes. From this deep experience, the authors have extracted a series of best practices, and those practices are conveyed in this article. One of the main themes of the article is that due diligence in the hedge fund arena is an interdisciplinary undertaking, incorporating law, regulation, operations, tax, accounting, structuring, finance and other disciplines, as well as – less tangibly – experience, judgment and a good sense of what motivates people. Another of the themes of the article is that due diligence is a continuous process – it starts well before an investment and often lasts beyond a redemption. This article, in short, highlights the due diligence considerations that matter to decision-makers at one of the most sophisticated allocators of capital to hedge funds. For managers looking to raise capital or investors looking to deploy capital intelligently, the analysis in this article merits serious consideration.
Read Full Article … -
From Vol. 4 No.42 (Nov. 23, 2011)
Speakers at Walkers Fundamentals Hedge Fund Seminar Provide Update on Hedge Fund Terms, Governance Issues and Regulatory Developments Impacting Offshore Hedge Funds
On November 8, 2011, international law firm Walkers Global (Walkers) held its Walkers Fundamentals Hedge Fund Seminar in New York City. Speakers at this event addressed various topics of current relevance to the hedge fund industry, including: recent trends in offshore hedge fund structures; hedge fund fees and fee negotiations; fund lock-ups; fund-level and investor-level gates; fund wind-down petitions and the appointment of fund liquidators; corporate governance issues; D&O insurance; fund manager concerns with Form PF; and offshore regulatory developments, such as proposed legislation requiring registration of certain master funds in the Cayman Islands, the EU’s Alternative Investment Fund Manager (AIFM) Directive and the British Virgin Islands (BVI) Securities & Investment Business Act (SIBA). This article summarizes the key points discussed at the conference relating to each of the foregoing topics and others.
Read Full Article … -
From Vol. 4 No.13 (Apr. 21, 2011)
Recent U.S. Tax Court Decision Suggests That Partners of Hedge Fund Management Companies Organized As Limited Partnerships May Be Subject to Self-Employment Tax
The U.S. Tax Court has ruled against a law firm limited liability partnership that had taken the position that its partners were not subject to self-employment tax on their respective shares of partnership income. The case is relevant to the hedge fund industry because some fund management companies are organized as limited partnerships whose individual limited partners also work for the partnership and render management services. We summarize the Court’s decision, emphasizing the self-employment tax discussion.
Read Full Article … -
From Vol. 4 No.12 (Apr. 11, 2011)
Investments by Family Offices in Hedge Funds through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part Two of Two)
Variable insurance policies are an often utilized structure through which family offices and other high net worth investors invest in hedge funds and other private investment funds. One of the primary advantages of investing in hedge funds and other private investment funds through variable insurance policies is the deferral of income taxes. However, policy holders must first satisfy two important tests – the “diversification rules” and the “investor control” rules – in order for the policies to qualify for favorable income tax treatment. This article is the second in a two-part series. The first article in this series described the mechanics of investing in an insurance dedicated fund through variable insurance policies and offered a roadmap for satisfying the two tests to ensure the variable insurance policies maintain their tax-advantaged status. See “Investments by Family Offices in Hedge Funds through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part One of Two),” The Hedge Fund Law Report, Vol. 4, No. 11 (Apr. 1, 2011). This article describes in detail a recent restructuring transaction in which the authors participated (the “Transaction”) and provides the key terms in the Transaction documents applicable to the diversification and investor control rules.
Read Full Article … -
From Vol. 4 No.11 (Apr. 1, 2011)
Investments by Family Offices in Hedge Funds through Variable Insurance Policies: Tax-Advantaged Structures, Diversification and Investor Control Rules and Restructuring Strategies (Part One of Two)
Variable insurance policies are an often utilized structure through which family offices and other high net worth investors invest in hedge funds and other private investment funds. One of the primary advantages of investing in hedge funds and other private investment funds through variable insurance policies is the deferral of income taxes. However, policy holders must first satisfy two important tests – the “diversification rules” and the “investor control” rules – in order for the policies to qualify for favorable income tax treatment. This article is the first in a two-part series of guest articles in the HFLR by James Schulwolf and Peter Bilfield, both Partners at Shipman & Goodwin LLP, and Lisa Zana, a Senior Associate at Shipman. This article describes the mechanics of investing in an insurance dedicated fund through variable insurance policies and offers a roadmap for satisfying the two tests to ensure the variable insurance policies maintain their tax-advantaged status. The second article in this series will describe in detail a recent restructuring transaction in which the authors participated and provide the key terms in the transaction documents applicable to the diversification and investor control rules.
Read Full Article … -
From Vol. 4 No.4 (Feb. 3, 2011)
IRS Enhancing Its Scrutiny of Tax Shelter Disclosures by Hedge Funds
In late 2010, the IRS Office of Chief Counsel issued a memorandum indicating that some common “protective” disclosures that are made by hedge funds and other investment partnerships are inadequate. This could result in significant penalties for a fund as well as its investors. In a guest article, Joseph Pacello, a Tax Partner at Rothstein Kass, discusses: the legal and accounting background of the IRS memorandum, including relevant tax disclosure requirements; the IRS Office of Chief Counsel’s analysis in the memorandum; penalties for failure to properly disclose a reportable transaction; and the likely impact of the IRS memorandum for both funds of funds and direct trading funds.
Read Full Article … -
From Vol. 4 No.2 (Jan. 14, 2011)
Accounting for Uncertain Income Tax Positions for Investment Funds
FIN 48, now included in ASC Topic 740 (Income Taxes) under the Financial Accounting Standards Board’s Codification, was issued in 2006 and after two one-year deferrals became effective for all entities issuing financial statements under Generally Accepted Accounting Principles (GAAP) for years beginning after December 15, 2008. FIN 48 was issued as an interpretation of FASB Statement 109, Accounting for Income Taxes, with the intent of reducing the diversity of practice in financial accounting for income taxes, including U.S. federal, state and local taxes as well as foreign taxes. A major component of FIN 48 is that its reach includes all statutory open tax years, not just the accounting reporting year. This requires that each year is looked at on a cumulative basis. Entities that report on a non-GAAP basis, such as International Financial Reporting Standards (IFRS), are not subject to FIN 48. FIN 48 has become a hot topic for fund managers and their auditors. Given the complicated nature of fund structures, global investment strategies and the variety of financial products that managers invest in, it is an important area, and one to which managers should allocate sufficient resources. In a guest article, Michael Laveman, a Partner at EisnerAmper LLP, discusses in detail the four-step process for adoption of and compliance with FIN 48.
Read Full Article … -
From Vol. 3 No.34 (Aug. 27, 2010)
Foundation for Accounting Education’s “2010 Hedge Funds and Alternative Investments” Conference Focuses on Taxation of Hedge Funds and Hedge Fund Managers, Structuring, Valuation, Risk Management, Due Diligence, Insurance and Regulatory Developments
On July 29, 2010, the Foundation for Accounting Education (FAE) presented its 2010 Hedge Funds and Alternative Investments Conference in New York City. Speakers at the one-day event focused on a range of issues impacting the hedge fund industry, including: FIN 48 (which relates to accounting for uncertain tax liabilities); ASU 2010-10 (which amends Statement of Financial Accounting Standards No. 167, which in turn requires nonpublic companies to publicly disclose their interests in variable interest entities in a similar manner to the disclosure provided by public entities); carried interest taxation developments; state and local tax developments relevant to hedge fund managers; tax implications of globalization of the hedge fund industry; special purpose vehicles; blockers; unrelated business taxable income and effectively connected income; mini-master funds; master-feeder and side-by-side structures; International Financial Reporting Standards; valuation trends; risk management; due diligence; insurance; and regulatory developments. This article details the key points discussed during the conference.
Read Full Article … -
From Vol. 3 No.31 (Aug. 6, 2010)
IRS Private Letter Ruling Offers Guidance to Hedge Funds Investing in Auction Rate Preferred Shares
The classification of interests issued by closed-end funds as debt or equity for tax purposes has significant ramifications for hedge funds that invest in such funds. Interests that are classified as debt generally allow holders to treat payments received from the fund as interest income and nontaxable principal repayments. By contrast, interests that are classified as equity generally allow investors to receive dividends, capital gains or a mixture of the two. A recent private letter ruling (PLR) issued by the Internal Revenue Service (IRS or Service) addressed the classification of preferred stock issued by a closed-end fund as debt or equity. The IRS determined that the preferred stock should be classified as equity for federal tax purposes. The PLR is significant for a variety of reasons. First, the fact that the PLR was issued at all represents a change in procedure for the IRS, which previously declined to issue rulings on the classification of financial instruments as debt or equity because of the fact-specific nature of such classifications. Second, the PLR has implications for hedge funds interested in the auction rate preferred shares market. This article examines the PLR, its background and its potential significance for hedge funds invested or considered an investment in auction rate preferred shares.
Read Full Article … -
From Vol. 3 No.26 (Jul. 1, 2010)
Potential Changes to Partnership Income Allocation Rules May Alter the Timing and Manner of Receipt of Income by Key Personnel at Hedge Fund Managers
On April 13, 2009, the Internal Revenue Service proposed regulations under Section 706(d) of the Internal Revenue Code (IRC) that could affect the timing and manner of receipt of income, gains and losses by key personnel at hedge fund management companies organized as partnerships or limited liability companies taxed as partnerships. The proposed regulations will become effective upon adoption, but no earlier than the first partnership taxable year beginning in 2010. Generally, the proposed regulations would require partnerships to take into account variations in partners’ interests during a taxable year and would prescribe two methods for doing so – an “interim closing of the books” method and a “proration” method. In addition, the proposed regulations provide guidance on the appropriate allocation of “extraordinary items” and the effect on allocations of changes to partnership agreements. Finally, the proposed regulations contain a safe harbor for services partnerships and publicly traded partnerships, clarify the allocation of deemed dispositions and amend the minority interest rule. This article discusses the current “varying interest rule” under IRC Section 706 and details the ways in which the proposed regulations would change the current allocation regime. In particular, this article discusses the mechanics of the two alternative allocation methods provided in the proposed regulations, timing conventions, changes in partnership allocations among contemporaneous partners, safe harbors, deemed dispositions and the minority interest rule. This article also discusses the implications of the proposed regulations for hedge fund managers and hedge funds. In brief, the proposed regulations are likely to have a greater impact on managers than funds because variations in interests of limited partners in hedge funds are and are accounted for as ordinary course events, while variations in interests of partners in hedge fund management companies are non-ordinary course. That is, subscriptions to and redemptions from a hedge fund occur routinely, whereas the admission of a new partner to a management company, or the termination of such a partner, occur only once in a while. It is the admission or termination of such key hedge fund manager personnel, or changes in interests of existing key personnel, that could be more directly impacted by the proposed regulations.
Read Full Article … -
From Vol. 3 No.12 (Mar. 25, 2010)
IRS Directive and HIRE Act Undermine Tax Benefits of Total Return Equity Swaps for Offshore Hedge Funds
As explained more fully below, total return equity swaps (TRSs) generally are contracts, often between a financial institution and a hedge fund, whereby the financial institution agrees to pay the hedge fund the total return of the reference equity during the swap term (including capital gains and dividends), and the hedge fund agrees to pay the financial institution the value of any decline in the price of the reference equity and interest on any debt embedded in the swap. In other words, the financial institution pays the hedge fund any upside, and the hedge fund pays the financial institution any downside plus interest. In this sense, the financial institution is the short party to the swap, and the hedge fund is the long party. Traditionally, hedge funds have used TRSs for three principal purposes, among others. First, hedge funds have used TRSs to gain economic exposure to companies without obtaining beneficial ownership of the stock of those companies, thereby avoiding the obligation to file a Schedule 13D and preserving the secrecy of incipient activist campaigns. Second, offshore hedge funds have used TRSs to obtain economic exposure to dividend-paying U.S. stocks while avoiding the 30 percent withholding tax typically imposed on dividends paid by U.S. public companies to non-U.S. persons. Offshore hedge funds have been able to use TRSs to avoid such withholding tax because, until recently, dividends were subject to withholding but “dividend equivalent payments” – the amount paid by a financial institution to a hedge fund under a swap by reference to the dividend paid by the relevant equity – were not. Third, hedge funds have used TRSs to obtain leverage. That is, the traditional way to get exposure to the total return of a stock was to buy it. However, TRSs enable hedge funds to get exposure to the total return of a stock by entering into a contract with a financial institution and posting initial and variation margin (which, even taken together, often constitute only a fraction of the market price of the stock). The first two of those purposes have been dramatically undermined by judicial and legislative action. Specifically, with respect to the use of TRSs in activist campaigns, in June 2008, the U.S. District Court for the Southern District of New York held that two hedge funds that had accumulated substantial economic positions in publicly-traded railroad operator CSX Corporation, principally via cash-settled TRSs, were deemed to have beneficial ownership of the hedge shares held by their swap counterparties. Accordingly, the court found that one of the hedge fund group defendants, The Children’s Investment Fund Management (UK) LLP and related hedge fund and advisory entities, violated Section 13(d) of the Securities Exchange Act of 1934 by failing to file a Schedule 13D within ten days of the date on which its beneficial ownership exceeded five percent. See “District Court Holds that Long Party to Total Return Equity Swap May be Deemed to have Beneficial Ownership of Hedge Shares Held by Swap Counterparty,” The Hedge Fund Law Report, Vol. 1, No. 14 (Jun. 19, 2008). With respect to the second purpose described above, in January of this year, the IRS issued an industry directive (Directive) outlining TRS structures that, in the agency’s view, may be used to improperly avoid withholding tax on dividends. See “New IRS Audit Guidelines Target Equity Swaps with Non-U.S. Counterparties,” The Hedge Fund Law Report, Vol. 3, No. 3 (Jan. 20, 2010). More recently, on March 18, 2010, President Obama signed into law the Hiring Incentives to Restore Employment (HIRE) Act (H.R. 2847), which contained provisions originally proposed as part of the Foreign Account Tax Compliance Act of 2009. See “Bills in Congress Pose the Most Credible Threat to Date to the Continued to the Continued Tax Treatment of Hedge Fund Performance Allocations as Capital Gains,” The Hedge Fund Law Report, Vol. 2, No. 52 (Dec. 30, 2009). Among other things, the HIRE Act will impose a 30 percent withholding tax on dividend-equivalent payments made to non-U.S. persons on or after September 14, 2010 on certain TRSs or pursuant to securities loans and “repo” transactions. While there is significant overlap between the TRSs targeted in the Directive and those for which withholding will be required under the HIRE Act, the HIRE Act covers a broader range of TRSs. While the third purpose of TRSs identified above – providing leverage – remains reasonably intact, the CSX case, the Directive and the HIRE Act collectively challenge the utility of TRSs for hedge funds, pose unique structuring challenges and change market dynamics that have existed for 20 years. Yet the Directive and HIRE Act may also, like other facially adverse actions or events, offer opportunities. With the goal of helping hedge fund managers navigate the changing tax consequences of TRSs, this article describes: the mechanics of TRSs in greater depth; the business benefits and burdens of TRSs; the Directive, including the specific scenarios identified by the IRS as meriting further attention from field agents; the relevant provisions of the HIRE Act; the likely market impact of the Directive and HIRE Act, including the specific impact on financial institutions, master-feeder hedge fund structures and TRSs written on a “basket” of equities; and potential structuring alternatives to avoid the adverse tax consequences of the Directive and HIRE Act.
Read Full Article … -
From Vol. 3 No.9 (Mar. 4, 2010)
Bill Redefining “Acquisition Indebtedness” for UBTI Purposes Could Diminish, But Likely Would Not Eliminate, Utility of “Blockers” in Hedge Fund Structures
A significant and growing proportion of the assets invested in hedge funds globally come from U.S. tax-exempt entities such as endowments, foundations, state pension funds and corporate pension funds that are “qualified” under Internal Revenue Code (IRC) Section 501(a). Mechanically, tax-exempt entities generally invest in a corporation organized in a low-tax or no-tax, non-U.S. jurisdiction, which in turn invests in an entity that buys and sells securities and other assets. The buying and selling entity is often organized in a tax-advantaged, non-U.S. jurisdiction as a corporation that “checks the box” for partnership treatment for U.S. tax purposes (although other structures and entity types are also used). See “Implications of Recent IRS Memorandum on Loan Origination Activities for Offshore Hedge Funds that Invest in U.S. Debt,” The Hedge Fund Law Report, Vol. 2, No. 41 (Oct. 15, 2009). Tax-exempt hedge fund investors go through these contortions to avoid paying tax, at corporate tax rates, on so-called Unrelated Business Taxable Income (UBTI). As explained in more detail in this article, the portion of interest, dividends and capital gains generated by a domestic hedge fund in a tax year based on “acquisition indebtedness” will constitute UBTI on which U.S. tax-exempt investors in that fund will owe tax at corporate rates. Specifically, a domestic hedge fund’s UBTI for a tax year generally is equal to the fund’s total interest, dividends and capital gains for the tax year times a percentage, the numerator of which is the fund’s average acquisition indebtedness and the denominator of which is the average cost basis of the fund’s investments. For example, if a domestic hedge fund had a total return (including interest, dividends and capital gains) for the tax year of $20 million, an average cost basis of $100 million and average acquisition indebtedness of $30 million, the fund would have $6 million of UBTI for the tax year. That UBTI would be allocated pro rata to the fund’s tax-exempt investors for tax purposes. So if the fund had two tax-exempt investors with equal investments, at a corporate tax of 35%, each would owe tax of $1.05 million on its distributive share of the fund’s UBTI for the tax year. By contrast, if a tax-exempt investor invests in a corporation that in turn invests in a lower-tier trading entity, the UBTI created by the trading entity’s acquisition indebtedness will not flow through to the tax-exempt investor, and the investor will not owe tax on the UBTI (unless the investor’s purchase of shares in the corporation was itself financed by acquisition indebtedness). This is because the Internal Revenue Service respects the ability of corporations to “block” UBTI. See “IRS ‘Managed Funds Audit Team’ Steps Up Audits of Hedge Funds and Hedge Fund Managers, and Investigations of Hedge Fund Tax Compliance Issues,” The Hedge Fund Law Report, Vol. 2, No. 34 (Aug. 27, 2009). On July 31, 2009, Rep. Sander Levin (D-MI) introduced H.R. 3497, a bill that would revise the definition in the IRC of “acquisition indebtedness” to exclude debt incurred by a U.S. partnership for investments in “qualified securities or commodities.” (Levin had introduced similar legislation in 2007.) In short, if Levin’s bill were to become law, it would diminish the rationale for investments by U.S. tax-exempt investors in hedge funds via offshore corporations. However, offshore corporations exist in hedge fund structures for reasons other than blocking UBTI, so even if Levin’s bill were to become law, the case for offshore corporations could remain compelling. This article offers a more comprehensive discussion of the taxation of UBTI; tax-exempt investor attitudes towards UBTI; structuring of hedge funds to enable tax-exempt investors to avoid UBTI; the mechanics of the Levin bill; the potential impact of the Levin bill if enacted on tax-exempt hedge fund investors as well as non-U.S. investors; and the likelihood of enactment of the Levin bill.
Read Full Article … -
From Vol. 3 No.4 (Jan. 27, 2010)
What Effect Will the Carried Interest Provision in the Tax Extenders Act Have on Hedge Fund Managers that Are or May Become Publicly Traded Partnerships?
On December 9, 2009, the U.S. House of Representatives passed legislation that includes a provision that would tax as ordinary income any net income derived with respect to an “investment services partnership interest.” This carried interest provision in the Tax Extenders Act of 2009, H.R. 4213, would change the tax treatment of the performance allocation that, in years in which a hedge fund has positive investment performance, constitutes the bulk of a hedge fund manager’s revenue. Currently, most managers structure performance allocations so that all or most of such compensation is taxed as long-term capital gains at a rate of 15 percent. The carried interest provision would subject such compensation to tax at ordinary income rates, which for hedge fund managers generally would be at a marginal rate of approximately 35 percent. For more discussion of the Tax Extenders Act, see “Bills in Congress Pose the Most Credible Threat to Date to the Continued Tax Treatment of Hedge Fund Performance Allocations as Capital Gains,” The Hedge Fund Law Report, Vol. 2, No. 52 (Dec. 30, 2009). The Extenders Act also contains a provision that would effectively cause any publicly traded partnership (PTP) that derives significant income from investment advisory or asset management services to be treated, for tax purposes, as a corporation. This is because the provision would treat carried interest income as non-qualifying income for purposes of determining whether a PTP meets the 90 percent “good income” test. That test specifies that partnerships that (1) satisfy the 90 percent good income test (described in more detail in this article) and (2) are not registered under the Investment Company Act of 1940 will, in general, continue to be treated as partnerships and not as Subchapter C corporations for federal income tax purposes. This article examines the federal tax treatment of the carried interest received by hedge fund managers, as well as the tax treatment of PTPs. The article also outlines the likely effects of the Extenders Act on the tax treatment of both, and explains tax planning steps that hedge fund managers may take to avoid some of the adverse tax consequences of the bill.
Read Full Article … -
From Vol. 3 No.3 (Jan. 20, 2010)
IRS Issues Guidance on Compliance with Section 409A Requirements Applicable to Deferred Compensation Plans of Hedge Fund Managers
In 2004, as part of the American Jobs Creation Act, Congress amended the Internal Revenue Code to include Section 409A, which generally requires recipients of deferred compensation to elect the time and form of deferred compensation payments in a manner that complies with Section 409A and Sec. 1.409A-1(c) of the Income Tax Regulations. Failure to elect time and form properly, or utilizing an acceleration of deferred compensation payments, can subject the employee, director, independent contractor or other “service provider,” which may be an individual, corporation, partnership or limited liability company, to an additional 20 percent income tax, accelerated taxation of the deferred payments and heightened interest assessments. Section 409A was enacted in response to the corporate scandals of the early Naughts, such as Enron, Tyco and WorldCom, and was intended to curb the practice of executives deferring large amounts of compensation and to eliminate the ability of executives to vary the payment schedule by which they received deferred compensation. In attempting to curb these perceived “evils,” Congress, in enacting Section 409A, created a statute that is hyper-technical in its application, with harsh penalties for noncompliance. Hedge fund managers, who may be considered “service providers” under the statute, should examine compensation plans that include any form of deferred compensation, including deferral of management or performance fees, for compliance with Section 409A. Because the penalties for noncompliance are harsh, the Internal Revenue Service (IRS) has issued guidance on correcting plan failures. In 2008, the IRS provided guidance on operational failures. However, on January 5, 2010, the IRS issued Notice 2010-6, which provides guidance on correcting document failures. Both notices provide guidance relevant to hedge fund managers and should be closely examined. This article examines the scope of Section 409A and Notice 2010-6 and details the applicability of both to hedge funds and hedge fund managers.
Read Full Article … -
From Vol. 3 No.3 (Jan. 20, 2010)
New IRS Audit Guidelines Target Equity Swaps with Non-U.S. Counterparties
On January 14, 2010, the Large and Mid-Scale Business division of the IRS issued its “Industry Directive on Total Return Swaps Used to Avoid Dividend Withholding Tax” (Swap Audit Guidelines). In addition to providing audit guidance to IRS field agents auditing U.S. financial institutions and U.S. branches of foreign financial institutions, the Swap Audit Guidelines contain six Information Document Requests for agents to use to solicit information from financial institutions that have equity swap operations. The new guidance is substantially more detailed than the previous guidance. As a result, IRS audits of financial institutions undertaken in accordance with the Swap Audit Guidelines are likely to impose a significant compliance burden on affected companies. The purpose of the Swap Audit Guidelines is to assist IRS agents in “uncovering and developing cases related to total return swap transactions that may have been executed in order to avoid tax with respect to U.S. source dividend income” paid to non-U.S. persons. The Swap Audit Guidelines posit four different transaction structures involving equity swaps. If an IRS agent uncovers one of these fact patterns, he is encouraged to “develop facts supporting a legal conclusion that the Foreign Person retained ownership of the reference securities.” In a guest article, Greenberg Traurig, LLP Shareholder Mark Leeds examines those four transaction structures in depth, and discusses the implications of the Swap Audit Guidelines for over-the-counter derivatives markets participants.
Read Full Article … -
From Vol. 2 No.52 (Dec. 30, 2009)
Bills in Congress Pose the Most Credible Threat to Date to the Continued Tax Treatment of Hedge Fund Performance Allocations as Capital Gains
On December 9, 2009, the U.S. House of Representatives passed the Tax Extenders Act of 2009 (Extenders bill), H.R. 4213. The bill, if it were to become law, would extend through the end of 2010 a package of tax relief provisions that otherwise would expire at the end of 2009. Of particular interest to hedge fund managers are several provisions of the Extenders bill included with the goal of raising revenue to offset extended tax relief measures. Specifically, the bill includes a provision that would tax as ordinary income any net income derived with respect to an “investment services partnership interest.” The bill defines “investment services partnership interest” as a partnership interest held by a person where it is reasonably expected that the partner or a person related to the partner will provide substantial investment services to the partnership. The result of this provision would be to change the tax treatment of the performance allocation that constitutes, in up years, the bulk of hedge fund manager revenue. Currently, most managers structure performance allocations so that all or most of such compensation is taxed as long-term capital gains at a rate of 15 percent. The Extenders bill would tax such compensation as ordinary income, generally for hedge fund managers at a marginal rate of approximately 35 percent. In addition, as ordinary income, such compensation would be subject to any applicable self-employment taxes and state and local taxes. See generally “IRS ‘Managed Funds Audit Team’ Steps Up Audits of Hedge Funds and Hedge Fund Managers, and Investigations of Hedge Fund Tax Compliance Issues,” The Hedge Fund Law Report, Vol. 2, No. 34 (Aug. 27, 2009). As discussed in more detail in this article, the Extenders bill also includes provisions that are similar to the reporting provisions in the proposed Foreign Account Tax Compliance Act of 2009 (FATCA), introduced in the Senate as S. 1934 and in the House (with the same name) as H.R. 3933. With the support of President Obama and Treasury Secretary Geithner, FATCA was introduced on October 27, 2009 as a means of combating overseas tax havens. FATCA would affect all foreign financial institutions (FFIs) that invest in U.S. stocks and securities. Complying FFIs would be required to report financial account information of all U.S. persons to the Internal Revenue Service or subject all payments of U.S. source passive income and gross proceeds from the sale of U.S. securities to a 30 percent withholding tax. This article details and analyzes the provisions of the Extenders bill and FATCA that are most relevant to hedge fund managers. Where provisions of the two bills are similar, this article compares specific mechanics. This article also highlights the differences between the two bills, and discusses, with the benefit of insight from leading practitioners, the implications of the bills for hedge fund manager compensation, tax planning, domicile, structuring, reporting, treatment of so-called “recalcitrant account holders” and more.
Read Full Article … -
From Vol. 2 No.50 (Dec. 17, 2009)
Implications of the New U.K. Offshore Funds (Tax) Regulations for U.K. and Global Hedge Fund Managers and Investors
On November 12, 2009, the new Offshore Funds (Tax) Regulations 2009 were enacted in the United Kingdom (U.K.). At a general level, the new U.K. tax regime may have a profound effect on the tax rate paid by U.K.-based investors in offshore hedge funds. Specifically, the new regime has the potential to narrow the circumstances in which U.K.-based investors in offshore hedge funds are required to pay tax on most returns at higher income tax rates, as opposed to lower capital gains tax rates. Next year, the highest marginal income tax rate in the U.K. may rise to 50 percent, while the capital gains rate for individuals is likely to remain at 18 percent. While the new regulations remain subject to final legal and technical checks, they will be effective for accounting periods beginning on or after December 1, 2009. For several years, the U.K. government has been working on replacing the “distributing funds” tax regime with a “reporting funds” regime; the new regulations embody a “reporting funds” regime. Although the general purpose of both regimes is the same – to prevent investors from rolling up income offshore and paying tax at a lower capital gains rate when the relevant investment is sold – the change in regime may affect the type of fund that may generate returns subject to capital gains treatment for U.K. investors. This article outlines the mechanics of the new regulations and examines their likely effect on U.K. and global hedge fund managers and investors. In particular, this article details: the definition of “offshore fund” under the new regulations; reporting versus distributing funds; the new rules with respect to investments by offshore funds in other offshore funds; transitional arrangements; cross investments; the white list of qualifying transactions that will be treated for tax purposes as investment activities as opposed to trading activities; and administrative and legal consequences of the new tax regime.
Read Full Article … -
From Vol. 2 No.41 (Oct. 15, 2009)
Implications of Recent IRS Memorandum on Loan Origination Activities for Offshore Hedge Funds that Invest in U.S. Debt
On September 22, 2009, the Internal Revenue Service (IRS) Office of Chief Counsel issued a memorandum concluding that “interest income received by a foreign corporation with respect to loans that it originated to U.S. borrowers constitutes income effectively connected” with the conduct of a U.S. trade or business and is subject to net income tax in the U.S. Some hedge fund managers – especially those with funds focused on credit or lending – are concerned that the memo presages more focused attention by the IRS on investments by offshore hedge funds in U.S.-based debt. Other managers think the memo’s effect on hedge funds may be limited because it addresses a narrow fact pattern that differs in important ways from the typical approach taken by offshore funds to investments in U.S. debt. However, even those that distinguish the memo on its facts concede that, at a broader level, the memo may indicate a disposition on the part of the IRS to take a harder look at lending activities by offshore entities in general. The concern here is that even if this memo does not capture typical hedge fund investments within its purview, another memo that does may be in the offing. This article details the fact pattern and legal conclusions of the memo, then analyzes the potential implications of the memo for offshore hedge funds. In particular, the article explores: the extent to which the fact pattern in the memo resembles and departs from the typical structure of investments by offshore hedge funds in U.S. debt; efforts by offshore funds to structure debt investments to fit within the securities trading safe harbor; the components of lending activities that typically are and are not carried on by offshore hedge funds; secondary market purchases of U.S. debt by offshore hedge funds; whether the memo applies with greater or lesser force to the purchase by offshore hedge funds of loan portfolios; the leveling effect of the memo on the difference between independent and dependent agents; the effect of the memo on the tax concept of an “office” in the U.S.; and how the memo has already and is likely to, going forward, affect the structuring of offshore hedge funds.
Read Full Article … -
From Vol. 2 No.40 (Oct. 7, 2009)
Key Tax Considerations for Hedge Funds When Investing in Life Settlements
As discussed in an article last week’s issue of The Hedge Fund Law Report, life settlements offer hedge funds an uncorrelated investment category in an era when even assets heretofore considered uncorrelated have fallen in unison. That article, the first in a three-part series, provided a detailed overview of the primary legal and business considerations applicable to hedge funds when investing in life settlements. See “Hedge Funds Turning to Life Settlements for Absolute, Uncorrelated Returns,” The Hedge Fund Law Report, Vol. 2, No. 39 (Oct. 1, 2009). As in any investment, tax can have a profound effect on the economic return of life settlement investments. Accordingly, this article, the second in the three-part series, focuses on the tax considerations relevant to hedge funds, hedge fund managers and hedge fund investors in connection with investments in life settlements, including: taxation of life settlements (including income versus capital gains treatment of the “gain” on life settlements); varying tax consequences for domestic and offshore hedge funds and hedge fund investors; the impact of recent Internal Revenue Service (IRS) Revenue Rulings on the tax consequences of life settlement investments; relevant tax rules for offshore hedge funds (including “limitation of benefits” provisions, treaties, “effectively connected income” considerations, relevance of the jurisdictions of investors and “anti-avoidance” rules); the special cases of Ireland and Luxembourg, and the “double taxation” treaties between those jurisdictions, on the one hand, and the U.S., on the other hand (and the absence of such treaties between the U.S. and other jurisdictions, notably the Cayman Islands); the utility of the UCITS structure for investing in life settlements; tax consequences of premium financing arrangements; and the future of life settlement taxation in light of certain items in President Obama’s proposed budget. Part three in this series will focus in more depth on securitization of life settlements.
Read Full Article … -
From Vol. 2 No.40 (Oct. 7, 2009)
How Can Hedge Fund Managers Minimize Tax on Deferred Compensation from Offshore Hedge Funds?
Hedge fund managers are painfully aware of the U.S. government’s efforts to eliminate the tax benefits associated with their foreign deferred compensation plans. In 2004, Congress amended the Internal Revenue Code by adding Section 409A, which prohibited the use of foreign trusts in connection with deferred compensation plans. More recently, in 2008, Congress enacted IRC § 457A, which makes foreign deferred compensation plans fully income taxable as of January 1, 2017. As a result, the tax bar has been working overtime to develop tax compliant strategies that would mitigate the disastrous effects of Congress’ campaign to increase taxes on hedge fund managers’ income. Tax attorneys’ efforts have, however, been largely unsuccessful – until now. In a guest article, Kenneth Rubinstein, Senior Partner at Rubinstein & Rubinstein, LLP, details one strategy that has been developed that will significantly minimize the income tax payable on foreign deferred compensation and blunt the effect of IRC § 457A in a tax compliant manner. Based on the use of a “hybrid” trust that avoids the prohibitions of IRC § 409A and utilizing the long-standing tax advantages that Congress and the Internal Revenue Code bestow upon life insurance, this strategy will allow early access to the majority of deferred compensation assets on a tax-free basis and eliminate estate tax on plan assets upon the death of the manager.
Read Full Article … -
From Vol. 2 No.35 (Sep. 2, 2009)
Will Increased Tax Rates and More Onerous Regulation Cause Hedge Fund Managers to Leave London?
London is one of the world’s premier centers of hedge fund management. A recent ranking of the world’s 11 most successful hedge fund managers listed two headquartered in London: Winton Capital Management and Brevan Howard Asset Management. But there has been, for months now, a good deal of talk about an exodus of hedge fund managers from the U.K. That talk has been fueled by two factors: recent tax law changes and the European Commission’s proposed Alternative Investment Fund Managers Directive (Draft Directive). We detail the tax law changes, and analyze whether they and the Draft Directive really have the potential to engender the much-discussed flight, or whether such flight constitutes an exaggerated threat.
Read Full Article … -
From Vol. 2 No.34 (Aug. 27, 2009)
IRS “Managed Funds Audit Team” Steps Up Audits of Hedge Funds and Hedge Fund Managers, and Investigations of Hedge Fund Tax Compliance Issues
The hedge fund industry has found itself in the crosshairs of various regulators and legislators recently, with a spate of bills and proposed regulations relating to governance of the industry. What’s less known, yet equally if not more relevant, is that the Internal Revenue Service (IRS) has a managed funds audit team that was created two years ago and is currently stepping up its audits of hedge funds and hedge fund managers and its investigations of hedge fund tax compliance issues. (The unit also focuses on private equity funds and their managers.) The IRS noted in a statement: “The service seeks to identify any areas of possible non-compliance in the income tax reporting of hedge fund and private equity fund investors and managers, as well as possible non-compliance in the reporting of withholding obligations.” The managed funds audit team focuses on areas such as compliance with filing requirements, income recognition, characterization of income as ordinary or capital gains, the flow of funds between onshore and offshore entities, the allocation and timing of incentive payments and other income and the accounting methods used to reflect and record income. The IRS has focused significantly on training auditors on tax issues related to the hedge fund industry. Within the hedge fund industry, tax audit activity has increased in the last year. In September 2008, hedge funds experienced the team’s first real push to conduct audits. We discuss the formation of the managed funds audit team; what actions may trigger an audit; key areas of focus in audits (including a discussion of the wash sale and straddle tax rules); offshore concerns (including deferral and UBTI issues); violations and remedies; how to prepare for an IRS audit; differences between IRS audits and SEC or financial audits; and the length of audits and appeals.
Read Full Article … -
From Vol. 2 No.22 (Jun. 3, 2009)
Hedge Fund Managers Using “Mini-Master Funds” to Retain Favorable Tax Treatment of Performance-Based Revenue from Offshore Funds
With the passage last year of legislation eliminating the ability of U.S. hedge fund managers to defer taxes on fee income from their offshore funds, managers are increasingly employing so-called “mini-master funds” to obtain a different kind of favorable tax treatment for the same revenue. Traditionally, in a master-feeder structure, managers would enter into an investment management agreement with the offshore fund, which in turn would invest substantially all of its assets (from non-U.S. and U.S. tax-exempt investors) in a master fund. The investment manager would charge the offshore fund a “performance fee” of 20 percent of the gains on its investment in the master fund. Before last year, managers were able to defer tax on the performance fee by reinvesting it in the offshore fund. However, Internal Revenue Code Section 457A, adopted as part of the Emergency Economic Stabilization Act of 2008, disallows such fee deferrals and requires hedge fund managers to take all existing deferrals into income by 2017. Mini-master funds seek to circumvent this rule by converting the performance “fee” into a performance “allocation.” We explain precisely how mini-masters can accomplish this, and in the course of our discussion explore traditional fee deferrals, the operation of Section 457A, the tax effect of mini-masters, jurisdictional issues and what proposals relating to the taxation of carried interest may mean for the continued utility of mini-masters. See “IRS Releases Further Guidance Affecting Offshore Hedge Fund And Other Pooled Investment Vehicle Deferrals,” The Hedge Fund Law Report, Vol. 2, No. 6 (Feb. 12, 2009).
Read Full Article … -
From Vol. 2 No.21 (May 27, 2009)
The Future Will Be Better Tomorrow: The Obama Tax Agenda Is Released
On May 12, 2009, the Treasury Department released President Obama’s fiscal 2010 tax and revenue proposals in a lengthy book with a green cover. Accordingly, everyone is calling the list of proposals, the “Green Book.” President Obama did not desire to raise taxes during the worst recession in the last 80 years. As a result, most of the revenue proposals would not be effective until 2011, when the current economic crisis is expected to abate. The Green Book proposals have yet to be introduced as formal legislation. The current political climate and President Obama’s extraordinary popularity make the introduction and passage of the bulk of the proposals extremely likely. In a guest article, Mark Leeds and Diana Davis, Shareholder and Counsel, respectively, at Greenberg Traurig LLP, discuss in detail the Green Book, and its potential implications for hedge funds and their managers.
Read Full Article … -
From Vol. 2 No.19 (May 13, 2009)
Providing Certainty on Death and Taxes: The IRS Issues Initial Guidance for Sellers and Purchasers of Life Insurance Policies
On May 1, 2009, the Internal Revenue Service (IRS) issued two Revenue Rulings. In the first of these Rulings, Revenue Ruling 2009-13, the IRS addressed three different situations in which a U.S. individual insured disposed of his rights under a life insurance policy. In the second of these Rulings, Revenue Ruling 2009-14, the IRS addressed three separate situations in which a third party investor acquired the rights under a life insurance policy from the original owner and insured. While neither Ruling addresses all of the issues presented by the burgeoning life settlement industry in the United States, each does provide some much needed guidance in the area. In a guest article, Mark Leeds, a Shareholder with Greenberg Traurig LLP, provides a detailed discussion of the IRS guidance.
Read Full Article … -
From Vol. 2 No.15 (Apr. 16, 2009)
Hedge Fund Managers Contemplate Alternative Fee Structures in Anticipation of Passage of Federal and State Bills to Tax Carried Interest as Ordinary Income
For years now, bills introduced at the federal and state levels have sought to tax carried interest earned by hedge fund managers – traditionally, 20% of any gains made by the fund – as ordinary income. To date, none of those bills has gained sufficient traction to become law. However, the appearance of a line in President Obama’s budget relating to carried interest; a bill recently proposed by Rep. Sander Levin (D-Michigan) addressing and remedying some of the shortcomings that prevented past bills from becoming law; and various New York State and City efforts on the topic all have increased both the momentum and viability of increased tax on carried interest. In anticipation of such tax changes, hedge fund managers and academic tax experts are thinking about how to revise fee structures to mitigate the adverse impact of such new taxes on net income, returns and incentives. We detail the relevant provisions in the Obama budget, Rep. Levin’s bill, ideas from various academic experts on how fees might evolve in response to tax law changes and relevant New York State and City proposals.
Read Full Article … -
From Vol. 2 No.14 (Apr. 9, 2009)
Congress Introduces Legislation That Would Tax Offshore Hedge Funds as U.S. Corporations
On March 2, 2009, Senator Carl Levin (D-Michigan) introduced the Stop Tax Haven Abuse Bill of 2009 (the Bill). A similar bill was introduced in the Senate in 2007 (co-sponsored by then-Senator Barack Obama), but was not acted upon. The Bill, like its 2007 predecessor, contains numerous provisions generally intended to prevent U.S. taxpayers from holding assets in accounts of financial institutions located in so-called tax havens without disclosing the existence of those accounts to the Internal Revenue Service. The Bill, however, also contains an onerous provision (Section 103) which would cause hedge funds incorporated outside the United States, but managed from within the United States, to become subject to full U.S. corporate income tax. In a guest article, Jeremy Naylor, a Partner at White & Case, explains the mechanics of the bill, its potential effect on offshore hedge funds and why Senator Levin’s rationale in proposing the Bill may be at odds with the reality of the current tax law as applied to hedge funds.
Read Full Article … -
From Vol. 2 No.14 (Apr. 9, 2009)
Seward & Kissel Attorneys Propose Alternatives to Hedge Fund Taxation Regime in Obama Budget
The delivery of the Obama Administration’s first budget at the end of February heralded the end of an era for the U.S. hedge fund industry. Among its many proposals to sweep away the era of Reaganomics, the new Administration launched a plan to tax carried interest (also known in the hedge fund context as performance fees) at ordinary income rates. Peter Pront, a Partner at Seward & Kissel LLP and head of the firm’s Tax Group, and his colleague Ronald Cima, also a Partner in Seward’s Tax Group, recently sat down with The Hedge Fund Law Report to discuss their suggestions on hedge fund tax law changes that they think should be considered by the Obama Administration as alternatives to the Administration’s current proposals. We report on our conversation with Pront and Cima.
Read Full Article … -
From Vol. 2 No.11 (Mar. 18, 2009)
Proposed Tax Legislation Affecting Hedge Funds
Bills introduced this month in both the House and the Senate contain two provisions that are of particular significance to hedge funds. One provision would materially alter the tax treatment of offshore hedge funds with U.S.-based managers, and the other provision would change the tax treatment of “dividend equivalent” payments made on notional principal contracts (or “swaps”) that reference U.S. stocks. The proposed legislation, which was introduced by Senator Carl Levin (D-Michigan) and Representative Lloyd Doggett (D-Texas), contains various other provisions, including the addition of certain reporting requirements, as well as certain presumptions to be applied in judicial and administrative proceedings, with respect to amounts derived by U.S. persons from offshore entities. In a guest article, Mary Conway, Lucy W. Farr and Rachel D. Kleinberg, all partners of Davis Polk & Wardwell’s Tax Department, explain the two provisions and the implications of the provisions for hedge funds.
Read Full Article … -
From Vol. 2 No.11 (Mar. 18, 2009)
IRS Guidance and Two House Bills Offer Tax Relief for Investors in Ponzi Schemes
On March 17, 2009, the Internal Revenue Service issued Revenue Ruling 2009-9 (Revenue Ruling) and Revenue Procedure 2009-20 (Revenue Procedure) which together provide additional guidance for taxpayers who have lost money in the Ponzi scheme orchestrated by Bernard Madoff and other Ponzi-type investment frauds. The Revenue Ruling generally provides that losses from Ponzi schemes are theft losses, and not capital losses; that such losses are not subject to the $3,000 annual limitation on capital loss deductions or the limitations on personal casualty and theft losses; and that the amount of loss can include “phantom income” received by the investor from the scheme, not just the principal invested by the investor. The Revenue Procedure provides a uniform approach for determining the proper time and amount of the theft loss. Generally, the Revenue Procedure deems a loss to be the result of theft if the promoter was charged with fraud or similar crimes; it does not require a conviction. Also, the Revenue Procedure generally permits taxpayers to deduct in the year of discovery up to 95 percent of their net investment, less certain actual and expected recoveries. We describe in detail both items of guidance, as well as two related House bills.
Read Full Article … -
From Vol. 2 No.8 (Feb. 26, 2009)
Stimulus Bill Permits Deferral of Cancellation of Debt Income Arising out of Repurchases by Issuers of their Distressed Debt
On February 17, 2009, President Obama signed into law the American Recovery and Reinvestment Act of 2009, containing the American Recovery and Reinvestment Tax Act of 2009 (2009 Tax Act), which provides for, among other things, deferral of recognition of certain cancellation of indebtedness income (CODI). That is, under tax law prior to the 2009 Tax Act, a taxpayer generally had to recognize income in the year in which it repurchased, cancelled or modified its debt, to the extent that the adjusted issue price of the old debt exceeded the amount of the new debt. Under the 2009 Tax Act, taxpayers are allowed to defer recognition of CODI until a five year period starting, for calendar year taxpayers, in 2014; deferred CODI has to be included ratably in income during that five year period. We explain the mechanics of the 2009 Tax Act, the effect on “deemed exchanges,” the consequences for deductibility of original issue discount in various circumstances and the applicable high yield debt obligation rules. We also highlight the potential pitfalls for hedge funds, especially those employing a distressed debt strategy.
Read Full Article … -
From Vol. 2 No.6 (Feb. 12, 2009)
IRS Releases Further Guidance Affecting Offshore Hedge Fund And Other Pooled Investment Vehicle Deferrals
On January 8, 2009, the Internal Revenue Service issued interim guidance (Notice 2009-8) under Internal Revenue Code Section 457A. Enacted in October 2008, Section 457A largely eliminates compensation deferrals by nonqualified entities – in general, tax-indifferent non-U.S. corporations or partnerships (U.S. or non-U.S.) with tax-indifferent partners. In a guest article, Jonathan M. Zorn, Brett A. Robbins and Lucas Rachuba describe the mechanics of the interim guidance – including a discussion of the treatment of deferrals attributable to periods before and after January 1, 2009 – and explain how the interim guidance may impact hedge funds and their managers.
Read Full Article … -
From Vol. 1 No.23 (Oct. 28, 2008)
The End of Deferral As We Know It: The New Rules Prohibiting the Deferral of Compensation Paid to U.S. Managers By Off-Shore Hedge Funds
On October 3, 2008, Congress enacted, and President Bush signed, legislation that will curtail deferral of compensation payable by off-shore funds to U.S. managers beginning in 2009, and require that income previously deferred be recognized no later than 2017. In a guest column, Mark Leeds and Yoram Keinan, Partner and Of Counsel, respectively, at Greenberg Traurig, LLP, offer a thorough analysis of the mechanics of the new legislation and what it means for hedge fund managers in structuring their funds and compensation arrangements.
Read Full Article … -
From Vol. 1 No.22 (Oct. 10, 2008)
New Tax Law Restricts Hedge Fund Fee Deferral Arrangements
The $700 billion “bailout bill” signed into law on October 3, 2008 contains changes to the U.S. tax code that will effectively eliminate the ability of U.S. hedge fund managers to defer paying tax on fee income from their offshore hedge funds. The new law, enacted as part of the same bill that contained the Emergency Economic Stabilization Act of 2008, will impose U.S. tax on a current basis on deferred compensation from offshore entities that are not subject to U.S. tax or to a comprehensive non-U.S. income tax, with the principal target being U.S. managers of offshore hedge funds. In a guest article, Kirkland & Ellis partner Andrew Wright provides a lucid analysis of the relevant provisions of the new law.
Read Full Article … -
From Vol. 1 No.19 (Aug. 21, 2008)
Quick, Easy and Wrong: Congress Considers Legislation to Curtail Energy Trading and the Use of Off-shore Blockers
On August 1, 2008, Senators Ron Wyden (D-Ore.) and Charles Grassley (R-Iowa) proposed legislation that would make the tax code even more complicated and obtuse and would curtail the use of so-called “foreign blockers” by tax-exempt investors. The one sentence take-away on the Wyden-Grassley bill is that it would eliminate long-term capital gains treatment, as well as preferential treatment for tax-exempt entities, on profits from investments in the oil and gas markets, beginning in 2008. In this article, guest contributors Mark Leeds and Rita Cameron, shareholder and associate, respectively, at Greenberg Traurig, provide a lucid, informed and critical analysis of the proposal. In their view, the proposal could have a profound and adverse effect on tax-exempt US investors in offshore hedge funds. In the worst case scenario, it could even trigger provisions sometimes found in offshore feeder documents that allow tax-exempt investors to redeem if there is a change in law (or in some cases even a proposed change in law) that would adversely affect the tax treatment of their investments. On the positive side, the proposal has only a slim chance of becoming law, at least in its current form.
Read Full Article … -
From Vol. 1 No.19 (Aug. 21, 2008)
Taxing Speculation?
A new proposal to control oil and gas speculation through increased taxation of capital gains made through offshore hedge funds, index funds and various other investment vehicles has sparked concern among an array of energy and tax-policy experts who monitor Capitol Hill. An energy policy expert interviewed by The Hedge Fund Law Report expressed doubts about whether such legislation would have any effect on gas prices, and a Washington lawyer suggested that flaws and complexity would undermine the likelihood of the proposal becoming law. Others identified additional problems with the proposal.
Read Full Article … -
From Vol. 1 No.16 (Jul. 22, 2008)
An IRS Trifecta: Three Public Releases Affecting Hedge Funds and Funds of Funds Issued on One Day
A triumvirate of IRS releases all issued on July 3, 2008 clarify the deductibility of hedge fund investment interest expenses by hedge fund investors, and the tax treatment of fund of funds management fees. Guest contributor Mark H. Leeds, a Shareholder of Greenberg Traurig LLP, explains the releases in a lucid, insightful and timely article.
Read Full Article … -
From Vol. 1 No.15 (Jul. 8, 2008)
IRS Rules that Long Position in a Swap Referencing a Broad-Based US Real Property Index is Not a US Real Property Interest for FIRPTA Purposes
On June 12, 2008, the IRS published Revenue Ruling 2008-31, holding that a long interest in a swap referencing a broad-based index of US real property is not a US real property interest within the meaning of the Foreign Investment in Real Property Tax Act of 1980. Good news for offshore hedge funds looking for broad-based exposure to US real property; even better news for index publishers.
Read Full Article … -
From Vol. 1 No.12 (May 20, 2008)
House Passes Tax Provision Targeting Hedge Fund Fee Arrangements
- Legislation that would eliminate the ability of US hedge fund managers to defer paying tax on management and performance fees from offshore hedge funds cleared the House of Representatives on May 21, 2008.
- Disputes over PAYGO in the Senate and a threatened White House veto likely will impede passage of this particular bill. However, the appearance in Congress of multiple legislative proposals targeting offshore fee deferrals, combined with the current media spotlight on hedge fund fee arrangements, increase the likelihood of passage of legislation curtailing offshore fee deferrals.
-
From Vol. 1 No.11 (May 13, 2008)
MFA Presses for Guidance on Securities Trading Safe Harbor
In a letter to the Treasury and IRS, MFA took the position that an offshore hedge fund’s restructuring of previously acquired debt and workout negotiations in connection with that debt should fall within the securities trading safe harbor, and therefore should not be treated as a US trade or business and should not be subject to US tax.
Read Full Article … -
From Vol. 1 No.2 (Mar. 11, 2008)
Third Circuit upholds Treasury Regulation providing that a foreign corporation, to be eligible to claim tax deductions in connection with real property activities in the United States, must file its tax return within 18 months of the filing deadline set forth in Internal Revenue Code Section 6072
- In a recent decision, the Third Circuit Court of Appeals held that for a non-US corporation to claim tax deductions in connection with its US real property activities, it must file its tax return within 18 months of the year in which income was earned.
- In so holding, the Circuit Court upheld the validity of Treasury Regulation 1.882-4(a)(3)(i).
- Court analyzed the IRS regulation under Chevron, and found that it was within the scope of Congress’s delegation of rulemaking authority to the IRS.
- Case suggests that Courts will give heightened deference to IRS rulemaking, because tax is “complex and highly technical.”