True or false: The largest U. S. businesses are under continuous audit by the IRS. False. Some are effectively immune from audit. Whether a business is audited every year depends in part on its form of organization. While the tax planning strategies and low effective rates of household-name, publicly traded corporations have made newspaper headlines, those companies are regularly and thoroughly examined by the IRS. But large, widely held partnerships, including publicly traded partnerships ( PTPs) - which generally have thousands of direct and indirect partners - seem largely to escape the scrutiny that the Service gives to their C corporation counterparts. PTPs (such as oil and gas and real estate funds and investment funds like the Blackstone Group LP, the Carlyle Group LP, and KKR and (2) the Fund's stock underwriting business does not fit within the narrow circumstance under which a foreign underwriter can qualify for the trading safe harbor exceptions. If we assume that the Fund's activities.
Is Your Hedge Fund a Trader or an Investor? By Robert Gordon, Twenty- First Securities Corporation Originally published in the Journal of Wealth Management Summer 2005 It is a well-accepted fact that most hedge funds are often somewhat tax-inefficient. Gordon [2004] discussed what hedge funds could do to make their trading more tax-efficient. Here, we turn to a somewhat different question, highlighting a problem that most hedge fund investors will face even when their hedge funds employ such tax-friendly trading tools. Indeed, the answer to the apparently innocuous question of whether a hedge fund manager is classified as a trader or an investor could well be the burning issue for individuals investing in hedge funds. For most individuals, the “wrong” answer can cause taxes to be paid on “phantom” profits, and the IRS definition of “trader” may surprise you. Suggested Reading: Massachusetts Defines Trader Domestic hedge funds are traditionally set up as flow-through entities, partnerships or limited liability companies ( LLCs). The purpose of this structure is to insure that profits are only taxed at the level of the investor, rather than potentially twice, as would happen if the funds were structured as corporations. But a flow-through entity paying high fees to the investment manager can inadvertently force its investors to pay tax on more income than they actually earn. In this brief article, we quickly review the nature of the problem and the reason why it is a topical issue at this time. We then discuss a variety of possible solutions, ranging from the characterization of fees, to wrap-vehicles and derivative contracts. Note that no solution is absolutely bulletproof, but most address one or another of the aspects of the problem. Accounting for management fees Management fees are taken as miscellaneous itemized deductions under Section 212. This type of deduction is.
Greater Rewards for Hedge Fund Managers Anyone who compares a hedge fund’s offering documents with those of a mutual fund cannot but be struck by the enormous difference in rewards for the managers of hedge funds vis-à-vis that of mutual fund managers. Because mutual funds (and closed-end funds) may offer their securities to the “great investing public,” their managers are greatly restricted in their rewards – the fees for investment advisors are limited to a percentage of assets under management ( AUM). Rewards based on the fund’s actual performance for its investors are strictly forbidden. On the other hand, the mutual fund manager is still entitled to his fee even if the fund’s performance has been very poor. The unhappy mutual fund investor, therefore, must “vote with his feet” (and redeem his shares) to deprive the manager of his advisory fee. By contrast, the hedge fund world is very different. The nature and tax implications of the rewards received by a hedge fund manager are intertwined with the fund’s domicile and organisational structure. An investment advisor to a domestic hedge fund generally receives compensation composed of an investment management fee and an incentive (performance-based) reallocation of profits. The investment management fee is an asset-based fee similar to the advisory fee charged by advisors to registered investment companies and is designed to provide the investment manager with current cash flow to maintain operations. The investment management fee is generally 1% to 2% of AUM. Although the typical fund offering provides for a management fee paid to the manager periodically (eg, monthly or quarterly, usually in advance but sometimes in arrears it is the rare hedge fund manager who can survive even on a fee of 2% of AUM. Rather, it is in the “performance reallocation of profits” (for domestic funds with an entrepreneurial manager.
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