TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, June 22, 2005

Sheppard on Massive Giveaway in Partnership Compensatory Options Regs

Sheppard Tax_analysts_75Lee A. Sheppard (Contributing Editor, Tax Analysts) has published Massive Giveaway in Partnership Compensatory Options Regs, 107 Tax Notes 1487 (June 20, 2005), also available on the Tax Analysts web site as Doc 2005-12910, 2005 TNT 118-9.  Here is part of the Introduction:

The usual formula for compensation for hedge fund managers is "2 and 20"; that is, 2% of assets under management and 20% of the profits....  By way of contrast, mutual funds commonly charge fees of 1% of assets under management, without taking a share of the profits.

So what's that got to do with tax?  Hedge funds are partnerships.  Partnership practitioners can't stand the idea that the code says what it says, that § 83 applies to compensatory grants of interests and options in partnerships. Partnership practitioners are whining even though the government, in the proposed compensatory partnership interests regulations, allows the parties to elect to value partnership profits interests or options at zero.  You read that right.  If a newly created profits partner makes a § 83(b) election with his partnership, he can value his compensatory interest at zero.  Substitute the words "hedge fund" for partnership and "a share in the hedge fund profits" for partnership profits interest, and you have an incredible giveaway.  In plain English, that means hedge fund managers are excused from tax on some forms of their excessive compensation.  Yes, the government is once again giving away the store to partnership practitioners, but in a sense, the government is pulling back.  The previous guidance on compensatory partnership interests was so sloppily reasoned and sloppily drafted that it amounted to "do whatever you want."  At least the proposed regulations were thought through, even if some of the answers are questionable.

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Tracked on Jun 22, 2005 5:32:38 AM