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Abstract: 

Private equity fund management fee waivers are once again on the radar, on the heels of recent comments by IRS officials that the agency is contemplating issuing new guidance and the First Circuit’s decision in Sun Capital. If effective, the waiver converts a fund manager’s ordinary income for services into a future profits interest in the fund that yields income taxed at capital gains rates, so the industry has much at stake as this debate heats up. This article looks at recent developments in fee waiver arrangements and analyzes the arguments that the IRS is likely to consider.

Keywords: management fee waiver; private equity funds; Sun Capital; IRC Sec. 707(a)(2)(A); Revenue Procedure 93-27; ordinary income ; capital gain

Affiliations:  1: McKenna, Long & Aldridge LLP; 2: McKenna, Long & Aldridge LLP.