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Using Target Allocations in Investment Funds: Pros, Cons, But Ultimately Uncertainties  


Author:  Lynn E. Fowler.; Heather Preston.


Source: Volume 28, Number 05, May/June 2015 , pp.17-24(8)




Journal of Taxation and Regulation of Financial Institutions

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Abstract: 

At first blush, using “target allocations” in an investment fund partnership agreement would seem to answer a significant concern of investors—ensuring certainty of distributions over the life of the fund. However, most partnership agreements for investment funds have not adopted this approach. The reason for this apparent inconsistency lies in a number of tax issues that arise from the use of an allocation approach that does not rely on the traditional safe harbors for respecting allocations for tax purposes. Until the IRS provides guidance in this area, it seems that the target allocation method will remain an outlier for investment funds.

Keywords: partnership agreements; target allocations; investment funds; IRC Sec. 704(b); fund allocations; economic effect

Affiliations:  1: Kilpatrick Townsend & Stockton LLP; 2: Kilpatrick Townsend & Stockton LLP.

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