Fee Waiver, Disguised Payment Rules Push Entrepreneurial Risk

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July 22 — Arrangements between partnerships and partners that lack significant entrepreneurial risk could constitute a disguised payment for services, the IRS said in guidance addressing management fee waivers and disguised fees.

The proposed regulations (REG-115452-14, RIN 1545-BM12) cover circumstances in which arrangements will be treated as disguised payments under tax code Section 707(a). They also propose conforming changes to rules governing guaranteed payments under Section 707(c) and give notice of proposed changes to Revenue Procedures 93-27 and 2001-43 relating to the issuance of interests in partnership profits to service providers.

“The drafters of this reg have demonstrated a flair for drama. Of the six examples, they saved the fee waivers to the last two,” Michael Grace, counsel at Whiteford Taylor & Preston LLP, told Bloomberg BNA July 22. “The government leveraged the issue of fee waivers into finally addressing the overall treatment of disguised payments for services.”