IRS and Treasury Release Proposed Regulations Addressing Management Fee Waiver Arrangements
The US Treasury and the IRS recently released proposed regulations under Section 707 of the Code addressing disguised payments for services. The proposed regulations, when finalized, would limit the use of management fee waiver arrangements. The preamble to the regulations also indicates that profits interests issued in certain instances will not be protected by Rev. Proc. 93-27 and Rev. Proc. 2001-43, which generally provide a safe harbor that treats the receipt of profits interests as non-taxable. Private equity sponsors who have implemented or are considering implementing a fee waiver arrangement should carefully consider the impact that the proposed regulations could have on such an arrangement.