Fund Management Fee Waivers Under Attack

On July 23, 2015, the IRS published proposed regulations under Code Sec. 707(a)(2)(A)¹ that recharacterize certain allocations and distributions to a partner as disguised payments for services provided by the partner (the "Proposed Regulations").² The Proposed Regulations reflect the IRS's long-standing lack of comfort with the so-called management fee waiver arrangements often utilized by investment funds to reduce taxes on profits paid to investment fund professionals. While the Proposed Regulations—which are to be effective prospectively after they are finalized—are expected to have only a limited impact on foreign investors and fund managers, the impact on U.S. managers of all funds could be material.