Comments on the Proposed Regulations on Disguised Payments for Services

13 Pages Posted: 16 Nov 2015

See all articles by Gregg D. Polsky

Gregg D. Polsky

University of Georgia School of Law

Date Written: November 14, 2015


On July 23, 2015, the Internal Revenue Service (IRS) and Treasury Department (Treasury) issued proposed regulations under section 707(a)(2)(A) of the Internal Revenue Code (the Code) relating to disguised payment-for-services transactions between partnerships and partners. These are my comments on the proposed regulations.

My overall conclusions are as follows. I support the proposed regulations and urge that they be finalized as quickly as possible with some relatively minor clarifications. The proposed regulations are faithful to the statutory text, legislative purpose, and legislative history of section 707(a)(2)(A). Furthermore, the proposed regulations represent a very reasonable approach to the necessary task (given the clear statutory directive in section 707(a)(2)(A)) of distinguishing between disguised payments for services, on the one hand, and bona fide partnership allocations and distributions, on the other hand. I also support the positions explained in the preamble regarding the government’s view of the current scope of Rev. Proc. 93-27 and the stated intention to revise Rev. Proc. 93-27 to carve out profits interests received in lieu of fixed fees.

I believe that the proposed regulations could be improved by making the following clarifications, both of which I believe are fully consistent with the language and spirit of the proposed regulations:

1) Specifically address, in the preamble or the regulations themselves, so-called “cashless contribution” fee waiver structures. 2) Recognize that general partner flexibility and discretion may affect the level of real risk taken on by service providers.

In addition, I recommend that the rationale behind the intention to modify the Rev. Proc. 93-27 safe harbor be explained. It appears that the rationale is that profits interests received in lieu of fixed fees can typically be easily valued by reference to the foregone fees, which makes perfect sense.

Keywords: management fee waivers, private equity tax

Suggested Citation

Polsky, Gregg D., Comments on the Proposed Regulations on Disguised Payments for Services (November 14, 2015). UNC Legal Studies Research Paper No. 2690905. Available at SSRN: or

Gregg D. Polsky (Contact Author)

University of Georgia School of Law ( email )

225 Herty Drive
Athens, GA 30602
United States

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