Public hearing scheduled to discuss fee waiver regulations
IRS takes next steps toward finalizing controversial rules
TAX ALERT |
On Jan. 27, 2016, the IRS announced that public hearings related to the proposed fee waiver regulations will be held on Feb. 26. The hearings will likely be the last opportunity for public comment on regulations, originally proposed in July 2015, intended to address certain perceived abuses involving fee waivers and profits interests.1 The proposed regulations were met with what the IRS described as “strong public interest,” and as a result, the IRS extended the public comment period. Among the comments were expressions of support from Senator Elizabeth Warren and others in Congress, for expeditiously closing a perceived loophole. In the end, over 150 separate comments were filed, although the vast majority represented short statements in support of Senator Warren’s original letter.
As we discussed in our articles, Disguised payments for services regulations may impact private equity deals and Fund managers must exercise care in applying proposed fee waiver regulations, these proposed regulations, if made permanent, could have a significant impact on techniques used by many managers of investment funds.
This impact may not be limited to investment funds using fee waiver arrangements that were the principal focus of the proposed regulations. As we previously noted in our article, Proposed regulations would redefine guaranteed payments, these regulations may also change the way many partnerships treat payments made to partners who perform services. The potential for other unanticipated effects is also addressed in RSM’s own comment letter, RSM comments on “fee waiver” regulations address employment tax issues.
In the time since the original issuance of the proposed regulations, Treasury and IRS officials have publicly commented on them on several occasions. As recent as Jan. 26, 2016, officials made comments that the IRS is “expeditiously working” to issue the regulations in final form. At that same forum, officials reiterated positons suggesting that the intent of the regulations was not to attack regular profits interests, but reinforced their position that safe harbor protection does not apply in situations where profits interests are issued to a legal entity other than the one providing management services. They also suggested that certain hardwired waivers may still be subject to these rules if the value of the waived fee can be clearly determined. The same officials also noted that changes to certain examples in the regulations related to guaranteed payments were not intended to apply to guaranteed payments for capital, and that any confusion on that score may be addressed in the final regulations.
The items publicly addressed by officials are most likely in response to the comments that were submitted, as they address many of the same issues raised by the comment letters themselves.
Those interested in speaking at the public hearing are required to provide written topic outlines to the IRS by Feb. 8.