Monthly Archives: August 2014

Applicable Federal Rates for September 2014

The Internal Revenue Code prescribes minimum imputed interest rates and time-value-of–money factors applicable to certain loan transactions and estate planning techniques. These rates are tied formulaically to market interest rates. The Internal Revenue Service updates these rates monthly.

These are commonly applicable rates in effect for September 2014:

Short Term AFR (Loans with Terms <= 3 Years)                                          0.36%

Mid Term AFR (Loans with Terms > 3 Years and <= 9 Years)                     1.86%

Long Term AFR (Loans with Terms >9 Years)                                              2.97%

7520 Rate (Used in many estate planning vehicles)                                    2.2%

Here is a link to the complete list of rates:  RR-14-22 — APPLICABLE FEDERAL RATES

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037

Private Equity Fee Waiver Planning Under Scrutiny, But Still Viable

Private equity firms sometimes waive management fees payable by portfolio investment entities or funds in exchange for new partnership interests in the entities or funds.  In theory, the practice is fair because the fee recipients surrender a certain stream of income in exchange for a partnership “profits interest” that may or may not produce future income.  The exchange is desirable to the private equity firms or managers because the partnership profits interest may ultimately produce more income than the management fee, because the receipt of the partnership profits interest may not trigger income tax, and because the future income from the partnership profits interest may in some circumstances be taxable at the 20% long-term capital gain tax gain rate rather than the almost-40% ordinary income tax rate.

Critics argue the practice is unfair because the fee waiver often occurs shortly before the fee is earned.  They also argue the “profits interests” could be engineered using inside information to be very likely to produce a future income stream, making the perceived risk-reward tradeoff disingenuous.  Whether the criticisms are fair or not, the Internal Revenue Service has been studying  the practice for a few years, but has not issued new guidance.

We believe it is unlikely new Internal Revenue Service guidance will ban fee waivers entirely.  It is more likely that new guidance will curb the most aggressive fee waiver transactions.  We continue to evaluate fee waiver planning that fits the current tax law.

If you want to learn more, here is a link to a more detailed analysis of the technical arguments for and against fee waivers:
http://isites.harvard.edu/fs/docs/icb.topic1321119.files/October%209%202013%20%20Articles%20and%20Readings/Fee%20Waivers%20-%20PE%20Firms.pdf

E. John Wagner, II
jwagner@williamsparker.com
941-536-2037