Sort-of translated from the original bureau-beancountingese, the ruling prohibits funds of hedge funds from claiming management and incentive fees on Schedule E, along with other partnership income or losses. Instead, the fees must be reported on Schedule A, where they are subject to two per cent and three per cent hurdles; some taxpayers will consequently lose all or some of the benefit of the deductions, depending on their income level and total deductions.
It’s not clear just how widely the ruling’s impact will be felt. Arthur Bell, principal of the eponymous accounting firm, said that his firm had encouraged clients to report in this manner all along, “as there is no support for the upper tier FoHF’s fees reporting otherwise,” and the IRS had telegraphed the ruling.
“If the IRS audits a fund and requires a change, the investor partners will have to file amended returns for one or more years. Some funds, and their investors, will be upset,” Bell said.
***ALERT: Incredibly boring and arcane document***
Rev. Rul. 2008-39
Section 702(b).—Character of Items Constituting Distributive Share
Internal Revenue Service
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