Taxes, Charity, and Hedge Funds: Tax Implications of Charitable Contributions of Leveraged Partnership Interests

The Journal of Wealth Management, Forthcoming

37 Pages Posted: 5 Jan 2022 Last revised: 2 Mar 2022

See all articles by Nathan Sosner

Nathan Sosner

AQR Capital Management, LLC

Roxana Steblea

AQR Capital Management, LLC

Date Written: January 4, 2022

Abstract

As a result of recent Treasury regulations, investment partnerships, such as hedge funds, might be required to allocate nonrecourse liabilities to their limited partners (LPs). This allocation of nonrecourse liabilities could result in recognition of capital gains by LPs when they contribute their partnership interests to a charity. We explain how such taxable gains upon charitable contributions arise and quantify how punitive they might be. Although investors in tax-efficient leveraged funds organized as investment partnerships are likely to recognize capital gains upon charitable contributions, when these capital gains are evaluated in the context of tax benefit and pre-tax return opportunities, they do not present a hurdle for tax efficient investing. For charitably inclined leveraged fund investors, the benefits of a fund’s tax efficiency greatly outweigh the capital gain tax liability they might incur upon contribution of their fund holdings to a charity.

Keywords: Hedge Funds, Partnership Taxation, Charitable Contributions, Discharge of Liabilities, Allocation of Nonrecourse Liabilities, Part Gift Part Sale Transactions, Tax-Efficient Investing

JEL Classification: G23, H24, K34

Suggested Citation

Sosner, Nathan and Steblea, Roxana, Taxes, Charity, and Hedge Funds: Tax Implications of Charitable Contributions of Leveraged Partnership Interests (January 4, 2022). The Journal of Wealth Management, Forthcoming, Available at SSRN: https://ssrn.com/abstract=4000764 or http://dx.doi.org/10.2139/ssrn.4000764

Nathan Sosner (Contact Author)

AQR Capital Management, LLC ( email )

One Greenwich Plaza
Greenwich, CT 06830
United States

Roxana Steblea

AQR Capital Management, LLC ( email )

Greenwich, CT
United States

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