United States

RSM comments on “fee waiver” regulations address employment tax issues

INSIGHT ARTICLE  | 

RSM's Washington National Tax office has submitted comments on recent proposed regulations dealing with so-called "fee waivers." In particular, the firm's comments focus on the impact of the proposed regulations or associated guidance on the issue of whether partners in a partnership may also serve as employees of the partnership. 

In general, the proposed regulations address the treatment of certain arrangements in which rights to receive fixed or determinable management fees from an investment partnership are waived or exchanged for profits interests in the partnership, and whether the profits interests issued in such an arrangement constitute disguised payments for services that must be treated as if they were amounts received by a non-partner. Inasmuch as the waived fees, and the profits interests received in exchange, are received in exchange for services, treatment of the profits interests as a fee paid to a nonpartner presents the question of whether the amounts may be treated as "wages" pursuant to an employer-employee relationship, or as fees paid to an independent contractor.  

RSM's comments explain a number of policy and technical considerations relevant to this question. 

In sum, the comments recommend that the IRS use this opportunity to clarify that the new standard for determining "nonpartner capacity payments" renders obsolete the most frequently cited statement of the apparent IRS position on this issue, Rev. Rul. 69-184. The comments further suggest that recognition of this development should open the way to IRS guidance providing that partners, who also receive payments for services provided in a nonpartner capacity (such as a fixed or determinable salary), should have those payments properly treated as wages or salaries if the common law standards for an employer-employee relationship, as to those payments, are satisfied.

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