Thursday, February 1, 2018
Gregg Polsky (Georgia) presents The Realities of Modern Elite Tax Practice: A Case Study of the Management Fee Waiver Strategy at Duke today as part of its Tax Policy Workshop Series hosted by Lawrence Zelenak:
For over 15 years, many private equity fund managers have used a technique—known as the management fee waiver—to try to claim what are effectively their weekly paychecks as capital gains. Recently, the Treasury and IRS explained that, at least in the government’s view, fee waivers (as historically drafted) actually do not work. Reports of recent 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 recommending, drafting, and justifying fee waivers. This paper attempts to fill that void.
In the end, the only reasonable conclusion is that a group of the smartest and most sophisticated and esteemed tax professionals, 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.