Academic says private equity fees not properly characterized for tax purposes

February 4
8:46 AM 2014

In an article on the February 3 edition of Tax Notes journal, University of North Carolina Law Professor Gregg D. Polsky wrote that the said fees are not properly characterized for tax purposes. He added that around hundreds of millions of dollars is lost to the federal government annually due to missed tax revenue.

The professor wrote that another tax strategy of private equity firms that should be scrutinized are the monitoring fees or those payments that companies give to private equity owners in return for what are labeled in regulatory filings as consulting and advisory services, The New York Times The Dealbook reported.

The core of the issue is if the payments should be treated as a business expense or a dividend. If it is a business expense then it is tax deductible but if it is a dividend, then it's not, the report said.

In a lot of instances, companies that are owned by private equity firms treat monitoring fees as business expenses and as such reduce their tax bills. However, Polsky said that these are more like dividends which are paid to owners whether or not services are given and is in direct proportion to how much stake they have in the firm.

According to the report, Polsky has a business interest in the issue. As a lawyer, he is representing an individual who has lodged whistleblower claims with the tax regulator IRS using the same arguments given in his write up which The Wall Street Journal first reported online.

The Private Equity Growth Capital Council, the private equity industry's lobbying group, however, disagreed with Polsky. The report quoted Steve Judge, the group's President and Chief Executive, who said in a statement, "Monitoring fees incurred are legitimate business expenses for private equity-owned portfolio companies. Federal and state revenue authorities have examined and affirmed the deductibility of monitoring fees earned by private equity managers."

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