Monday, April 10, 2017
Gregg Polsky (Georgia) presents Elite Tax Professionals Behaving Badly: The Sad and Sordid Management Fee Waiver Saga at Washington & Lee today as part of its Faculty Workshop Series:
For at least the past 15 years, many private equity fund managers have used a technique—known as a management fee waiver—to try to claim what is effectively their weekly paycheck as a capital gain. Recently, the Treasury and IRS explained that, at least in the government’s view, the vast majority of fee waivers do not actually provide the claimed tax result. Recent reports of significant audit activity relating to fee waivers suggest that the fee waiver saga may finally be coming to an end, but not before billions of tax revenues that are beyond the statute of limitations have been lost forever.
While much has been written on the substantive legal issues surrounding fee waivers, there has been no discussion of the prominent role that leading tax professionals have played in drafting, justifying, and defending fee waivers. This article discusses this sad and sordid aspect of the fee waiver saga. It is not a pretty picture. The only reasonable inference is that some of the most elite tax professionals in the United States, comforted by persistent IRS inertia in the partnership tax space and their own herding behavior, actively facilitated the exploitation of the audit lottery by their private equity clients. Because they were highly sophisticated, these clients did not need to be told of the very favorable audit lottery odds. As long as the IRS was moribund and “everyone” in private equity was doing it, all slept well at night. When fee waivers were publicly criticized by some commentators, instead of defending the technique, private equity tax advisors simply ignored the criticism, hoping the issue would just go away. If these tax professionals had good substantive arguments in their defense and were not merely facilitating lottery behavior, they surely would have defended their positions in the face of stinging public critiques.
These public critiques eventually were adopted by the government in the recent guidance. Only at that point did a small number of fee waiver proponents finally come out of the woodwork to publicly defend what they’d been doing for over fifteen years. That is also when the New York State Bar Association Tax Section circled the wagons, flouted their own explicit conflict of interest rules, and wrote a cynical report, all in the hopes of protecting a tiny, but immensely powerful, minority of its membership.