The Internal Revenue Service issued proposed regulations that could have broad implications for how partnerships can structure a valid ‘profits interest’. Taxand USA looks into this.
A profits interest in a partnership is commonly understood to mean an interest in only the partnership’s future profits or appreciation.
The Internal Revenue Service intends to modify Rev. Proc. 93-27 at the same time it issues final regulations. The preamble states that the IRS would exclude profits interests received in exchange for waiving a management fee from the Rev. Proc. 93-27 safe harbor.
This change to the revenue procedure would allow the IRS to also challenge the receipt of a profits interest in a waiver transaction based on the value of that interest.
Discover more: New Proposed regulations limit partnership profits interests
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The preamble to the new proposed regulations suggest that treasury intended to limit some of the more aggressive fee-waiver transactions by private equity managers. Partnership managers should pay close attention as these regulations are finalised because the regulations may make profits interests a somewhat less attractive part of executives’ overall compensation package.
