Hedge funds may face tax issues of entity structuring, carried interest, management fee waivers, and trading-related rules. This article highlights planning strategies and compliance considerations as the IRS continues to increase its scrutiny of these investment vehicles.
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TOPICS / PASSTHROUGHS
Partnership and LLC Taxation
Fifth Circuit rejects ‘passive-investor’ definition of limited partner
The Fifth Circuit, overruling the Tax Court, held that for purposes of the Sec. 1402(a)(13) exclusion from self-employment tax, “limited partner” means a partner in a limited partnership that has limited liability.
Dissolving business taxpayers: Selected procedural implications
Critical issues include marking returns as final, determining due dates for final returns, filing Form 966, closing IRS accounts, and handling audits of dissolved entities.
IRS watchdog cites resource limits, duplication in partnership audits
The Treasury Inspector General for Tax Administration assessed a soft-letter initiative and the IRS’s examinations of 82 major U.S. partnerships.
Partner redemptions from ‘dry’ partnerships
A partnership whose sole asset is all the stock of a corporation offers opportunities but with potential pitfalls.
Death of an LLC member: Basic tax considerations
A member’s death will likely require apportioning LLC income and may entail treatment of the interest as a sale or disposition or even terminate the LLC.
Penalties under codified economic substance doctrine upheld
The taxpayers’ deductions from microcaptive insurance transactions lacked economic substance under Sec. 7701(o), the Tax Court held, upholding a Sec. 6662(b)(6) underpayment penalty.
TEFRA petition filing deadline is jurisdictional
The Tax Court held it lacked jurisdiction over the Sec. 6226(b) deadline for filing a petition for readjustment of partnership items under the Tax Equity and Fiscal Responsibility Act’s regime, and the deadline could not be equitably tolled.
Prop. regs. would make permanent safe harbor for furnishing information on Sec. 751 property
Proposed regulations would provide permanent relief from certain reporting requirements related to sales or exchanges of partnership interests in partnerships owning inventory or unrealized receivables.
IRS updates FAQs on business interest limitation, premium tax credit
The updates reflect changes made in H.R. 1, P.L. 119–21, commonly known as the One Big Beautiful Bill Act.
PTEs need more notice of changes, more time to respond, AICPA says
In a letter to Treasury and the IRS, the AICPA seeks changes to tax reporting requirements for partnerships and S corporations.
Tax Court applies limited partner functional test for self-employment income
In Soroban Capital Partners, the Tax Court analyzed the roles, responsibilities, and capital contributions of three limited partners in a limited partnership and determined that they were limited partners in name only.
Final partnership adjustment not issued timely
The Tax Court found a regulation invalid to the extent it holds the period open for the IRS to issue a final partnership adjustment longer than the statutory 270 days after a partnership has submitted “everything required” for a complete modification request.
Changing an existing LLC’s federal income tax classification
LLCs changing from partnership tax treatment to corporation or vice-versa may encounter issues including gain recognition.
Partnership recapitalization: Lender admittance without liability reduction
The consequences under Subchapter K and Sec. 1001 must be considered in a debt modification in which a lender takes an equity position in a debtor partnership and there is no reduction in principal.
Outlier or beginning of a trend? Illinois redefines investment partnerships
With its 2023 gain-nonrecognition law, the state is welcoming more nonresident investors.
Signing partnerships’ returns and other tax documents
A recent Chief Counsel Advice memo underscores the importance of having the right person sign a partnership’s returns and other tax documents filed with the IRS.
Prop. regs. would modify reporting obligations for Form 8308, Part IV
The IRS issued proposed regulations that would modify partnerships’ reporting obligations for Part IV of Form 8308 with respect to sales or exchanges of certain interests in partnerships owning inventory or unrealized receivables.
IRS includes several AICPA recommendations in corporate AMT interim guidance
In a notice issued Tuesday, the IRS said it intends to partially withdraw proposed regulations and issue revised proposed regulations.
Potential recapture pitfall for profits-interest partners
Allocations under Regs. Sec. 1.1245-1(e)(2)(i) may result in profits-interest partners being allocated ordinary income even though they were not previously allocated any depreciation or amortization deductions.
TAX PRACTICE MANAGEMENT
2025 tax software survey
AICPA members in tax practice assess how their return preparation software performed during tax season and offer insights into their procedures.
