July 29, 2015
On July 23, 2015, the Internal Revenue Service (“IRS”) issued a Notice of Proposed Rulemaking (the “Notice”) which proposed Treasury regulations under Section 707(a)(2)(A) of the Internal Revenue Code of 1986, as amended (the “Code”). That section of the Code characterizes certain partnership allocations and distributions as payments for services rather than a distributive share of partnership income under Section 702 of the Code. The Notice proposed the addition of Treasury Regulations Section 1.707-2 and amended Treasury Regulations Section 1.707-1.

The most important consequence to understand about the proposed Treasury regulations is what they do not do. Ordinary carried interest structures with a percentage management fee based on capital commitments are not affected, and binding management fee waivers in exchange for an interest in future net profits over the life of the partnership are also respected and not recharacterized as disguised payments for services under Section 707(a)(2)(A).

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