The debate over whether management fee waiver strategies are a tax loophole has been given new life by New York comptroller Scott Stringer.
Stringer, a Democrat, told the New York Post that New York City and New York state should work together to stop fund managers from avoiding unincorporated business tax (UBT) through the tax strategy. Stringer believes fund managers should not be able to give up fees in exchange for priority allocation on future profits, which are not subject to New York’s UBT.
The practice is widely used in the industry; a 2009 Dow Jones survey quoted by the New York Times showed that 40 percent of 35 firms surveyed used at least some amount of due management fees for in-house fund commitments, or “skin in the game”.
Stringer called for an end of “one of many tax policies at the federal, state and city level that have contributed to an unfair system where middle-class New Yorkers pay more income tax than high-level private equity managers.”
However, tax lawyers argue any change to this law would be wholly artificial. This is because the GP never actually has the management fee credited to their account at the time the fee waiver occurs.
“You have to say that even though a manager never had constructive receipt of the fee when he gave it up, and acquired something totally contingent, he should be subject to an unincorporated business tax, even if no state, local or federal income tax would be due. It sounds absurd to me,” said one US tax attorney.
Stringer’s comments are not the first time NY officials have fired a warning shot on management fee waivers. In September 2012, TPG Capital, Kohlberg Kravis Roberts and Bain Capital were among a dozen or so private equity firms that were reportedly being investigated by New York attorney general, Eric Schneiderman, over the controversial tax strategy.
Legal sources said at the time that it was “unlikely” the investigations would produce any major changes in industry practice.