April 27 — The statutory basis for the IRS's proposed fee waiver regulations is intact, which means taxpayers involved in disguised payment arrangements prior to any final regulations “should be concerned,” a senior agency attorney said.
Clifford M. Warren, special counsel to the Internal Revenue Service associate chief counsel (Passthroughs and Special Industries), told tax practitioners April 27 that the proposed fee waiver regulations (REG-115452-14), technically apply to any fee arrangement between partnerships and partners entered into or modified from the effective date of the final regulations.
Although the rules aren't final yet, Warren said they are essentially an amplification of the tax code Section 707(a)(2) anti-abuse rules, enacted by Congress to discourage partners from circumventing the partnership capitalization rules.
In line with this view, he said the IRS and Treasury Department have taken the position that the proposed regulations reflect congressional intent for evaluating whether a particular arrangement should be regarded as a disguised payment for services.
“You should be concerned, the statutes are on the books,” commented Warren, during a panel discussion in Chicago sponsored by the Practising Law Institute. He added, “the law is the law.”
Warren was vague about the government's plans for finalizing the regulations.
“In terms of timing, we are busy we are working on it—this week, next week, last week. There is certainly progress being made,” Warren said. “It’s a tough, tough area.”
The proposed regulations take aim at arrangements in which partnership service providers, including fund managers, are compensated through profits interest. The regulations seek to limit the practice of reducing private equity fund manager tax obligations by classifying the funds as carried interest, which is taxed at a lower rate than ordinary income (141 DTR G-1, 7/23/15).
In addition, the proposed regulations make conforming modifications to the guaranteed payments regulations under Section 707(c) and adjust two revenue procedures, Rev. Proc. 93-27 and Rev. Proc. 2001-43, pertaining to the issuance of interests in partnerships profits to service providers.
Warren said the proposed regulations had been “well received,” but in some camps remain “controversial around the edges.”
The government has received a large number of comments and is now struggling to respond, Warren said.
He specifically noted that the government hopes to address comments from the New York State Bar Association with respect to bifurcating allocations (220 DTR G-5, 11/16/15).
He said the government also hopes to address characterizations of casual contributions and simple asset deals.
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