Proposed Anti-Fee Waiver Regulations: A Blueprint for Waiving Fees?
Tax Management Memo, Vol. 57, p. 87, 2016
18 Pages Posted: 12 Mar 2016 Last revised: 24 May 2016
Date Written: March 9, 2016
In 2015, the IRS published proposed regulations to address so-called fee-waiver arrangements. The proposed regulations purport to help distinguish between service-providing members of partnerships acting in partner and non-partner capacities. This article takes the position that the proposed regulations do not achieve that purpose. The proposed regulations present entrepreneurial risk as the factor that distinguishes between partner and non-partner capacities, but they do not define that term. Because the proposed regulations claim the purpose of distinguishing between partner and non-partner capacities, one would anticipate that the regulations would require the level of risk exposure of a person acting in a partner capacity to be greater than the risk exposure of a person acting in a non-partner capacity. The Article identifies that differential as risk delta, and demonstrates how the proposed regulations fail to require any risk delta for service providers who wish to be treated as acting in a partner capacity. Because the rules do not define entrepreneurial risk and provide no basis for determining whether a service provider has accepted sufficient risk, the Article predicts that taxpayers and their advisors will look to the examples to determine whether they can achieve partner capacity. Those examples provide a blueprint for providing partnership equity to service providers, and, as such, they provide a blue print for structuring fee-waiver arrangements.
Keywords: Partner capacity, non-partner capacity, profits interest for services, section 707, fee waivers, private equity funds, real estate funds, profits-only interests, Rev. Proc. 93-27
Suggested Citation: Suggested Citation