WASHINGTON (HedgeWorld.com)–New Internal Revenue Service regulations took effect New Year’s Day, broadening the scope of information reporting obligations and investor list maintenance requirements with respect to tax shelter transactions.
The new regulations, promulgated on Oct. 21, were written quite broadly, applying to hedge funds, private equity funds and certain funds registered under the Investment Company Act of 1940, according to the New York law firm Tannenbaum Helpern Syracuse & Hirschtritt LLP.
Michelle Kron, an associate at Tannenbaum Helpern, said Tuesday that the administration will likely consider a variety of carve-outs to the new regulations–”they’re talking about partnerships that mark their assets to market” as the beneficiaries of one such carve-out, for example.
Under the new requirements, fund managers and their investors will be required to disclose to the IRS their participation in any reportable transaction by completing and attaching Form 8886 to their respective federal income tax returns for each year in which their income tax liability is affected, or is reasonably expected to be affected, by such reportable transaction. Fund managers and other material advisers to the finds will also have to maintain lists of their investors and their investors’ tax identification numbers and keep copies of private placement memoranda available for potential audits.
Reportable transactions are those that fall into any of six categories: (1) transactions listed as tax shelters in notices, regulations or other guidance published by the IRS, (2) loss transactions resulting in a gross loss of at least US$5 million in any taxable year of US$10 million in any combination of taxable years for a partnership, (3) transactions marketed under conditions of confidentiality, (4) transactions with contractual protections against risk of loss of tax benefits, (5) transactions resulting in a significant book-tax difference of more than US$10 million in any taxable year and (6) transactions generating a tax credit greater than US$250,000 for an underlying asset held for a brief period.
Concerning the “loss transactions” and the “book-tax difference” categories, Tannenbaum Helpern said that no tax reduction motivation is required to cause either of those sorts of transactions to become reportable.
Ms. Kron said that she does not believe the promulgation of these rules has much to do with the government’s concern of late with issues of money laundering. “It’s simply a matter of the IRS’ desire to crack down on tax shelters,” she said.