Abstract
Much ink has been spilt regarding the case law on profits interests, and the existing literature provides a useful framework for analyzing whether the fee waiver strategy passes the common law tests. Section 707, conversely, continues to pose some underappreciated issues, especially in light of recent administrative law developments. In particular, the interaction between section 707 and the fee waiver strategy presents a nice vehicle through which to explore how Mayo touches on issues related to phantom regulations and regulatory deference standards. This Article will focus on those issues and will only briefly address the receipt of a waiver interest under the common law authorities.
Part II provides a basic overview of the fee waiver strategy and illustrates its principal tax benefits. It also discusses the litigation risks associated with any IRS common law argument against the strategy. Those risks should make a section 707 argument against the strategy far more attractive to the IRS. However, under existing case law, section 707(a)(1) does not reach the fee waiver strategy. And, as Part III explains, section 707(a)(2)(A) (the statutory provision most frequently cited in connection with attacks on the fee waiver strategy) should not apply in the absence of implementing regulations. Although some tax-specific authorities have blessed phantom regulations in some circumstances, section 707(a)(2)(A) probably would not be treated as self-executing under those authorities. Additionally, Mayo vitiates whatever force those authorities might have once enjoyed. Regarding section 707(c), Part IV shows that, contrary to Revenue Ruling 81-300, a distribution related to a gross income allocation does not qualify as a guaranteed payment, especially in light of the deference standards established by Mayo.
Although the arguments against the fee waiver strategy should fail under existing law, the IRS is currently studying fee waivers and might promulgate guidance regarding them. With that potential guidance in mind, Part V makes some general recommendations to the IRS regarding its rulemaking procedures, so as to conform agency practices to the Supreme Court's rejection of tax exceptionalism in Mayo.
Recommended Citation
Amandeep S. Grewal,
Mixing Management Fee Waivers with Mayo,
16 Fla. Tax Rev.
(2014).
Available at: https://scholarship.law.ufl.edu/ftr/vol16/iss1/1