Grewal: Mixing Management Fee Waivers with Mayo

Andy Grewal (Iowa), Mixing Management Fee Waivers with Mayo, 15 Fla. Tax Rev. ___ (2014):

This Article examines whether the management fee waiver strategy used by private equity firms to convert ordinary income into long-term capital gains actually works. Scholars have almost uniformly condemned the strategy, calling it "extremely aggressive," "profoundly piggish," or illegal. However, this Article shows that the critics substantially overstate their case (the provision of law most frequently cited by the critics doesn't even exist), especially in light of the changes in the tax-administrative law landscape wrought by Mayo v. United States.

Although the arguments against the fee waiver strategy should fail under existing law, the Treasury is currently studying fee waivers and might promulgate guidance regarding them. The enjoyment of low tax rates by the ultra-wealthy raises legitimate policy concerns, and those concerns support regulations prospectively curtailing the fee waiver strategy (or legislation phasing out the capital gains preference for the ultra-wealthy). However, the Treasury has improperly exercised its rulemaking power on several recent occasions and has suffered significant judicial rebukes. This Article consequently argues that the Treasury should observe general administrative law doctrines in promulgating any guidance regarding fee waivers and offers recommendations to change the agency's current rulemaking practices, so as to take into account the Supreme Court's rejection of tax exceptionalism in Mayo.