“The changes to the taxation of carried interests is a huge development for the taxation of hedge fund managers,” wrote Kleinberg, Kaplan, Wolff & Cohen PC, a boutique law firm that works with hedge fund clients, in a note on Dec. 21 -- the day before Trump signed the tax bill. The firm highlighted how the new law could cause the investment returns on money in the general partner’s entity to be subject to the three-year holding period.
A “minimum action” to take would be converting part of the GP interest in the fund to an LP interest, according to KKWC. It didn’t specify whether it was referring to shifting the realized gains or untaxed gains out of the GP interest. Jeffrey Bortnick, a partner at KKWC, declined to comment.
Maneuvers involving carried interest would have been relatively easy to do, Spiro said, given that many fund agreements allow for the automatic re-designation of partnership interests and sales of securities. And the moves generally didn’t affect a fund’s trading strategy.
Setting a three-year holding period was supposed to save the federal government $1.1 billion over a decade, but workarounds to avoid the three-year holding period could chip away at that number.
IRS Attack
Rafael Kariyev, a tax partner at Debevoise & Plimpton, warns that “any structure designed to avoid the carried interest provision is likely to be attacked by the IRS in regulations or other guidance.”
Marisol Garibay, a Treasury spokeswoman, didn’t respond to requests for comment about IRS guidance on carried interest profits.
The agency has already said it will close a carried interest loophole after Bloomberg News reported that hedge funds were rushing to take advantage of a potential workaround for the new three-year holding period by setting up thousands of limited liability companies for managers entitled to the payouts.
“People will be creative in trying to structure around the three-year holding period, but folks will need to be mindful,” said David Sussman, a lawyer who chairs the private investment funds practice at Duane Morris.
This article was provided by Bloomberg News.