The trouble with fee waivers
Last year, the IRS proposed new rules designed to curb private equity fee waivers. The industry has been grappling ever since with how to interpret the announcement. One thing is evident: the IRS believes that fee waivers can be used to improperly convert ordinary fee income into capital gains. Without outlawing the practice entirely, the proposed rules are intended to give any private equity firm and its general partners pause before entering into a fee waiver arrangement. At the same time, the proposed rules confirm that properly structured arrangements should be respected.
As private equity general partners and their tax planners look to the year ahead, they will have to deal with the requirements of current law, new restrictions the IRS has proposed and the possibility that the final regulations may add even more restrictions.
Featured in Private Funds Management, this article discusses what the rules say, what they mean and what uncertainties remain.