New York City Unincorporated Business Tax Update: City Looking to Alter Its Position on Investment Management Partnerships
1/20/2012
We have been informally advised that the New York City Department of Finance (“the Department”) intends to change its position regarding the taxation of investment management partnerships that are subject to the City’s unincorporated business tax (“UBT”). If this new policy is implemented, most New York City-based investment management partnerships that receive an allocation of profits as an incentive from an investment partnership may be adversely impacted.
Many management companies of hedge funds are structured whereby advisory or management fees are received by one legal entity (the “Investment or Management partnership”). A second compensation component, a carried interest or incentive allocation, is received by a separate legal entity, often organized as an out-of-state partnership or limited liability company (“Carried Interest Partnership”). The bifurcation between these two separate legal entities was done as the City’s UBT was imposed on management fees earned within the city, while the carried interest or incentive allocation was previously not subject to the UBT, as the Carried Interest Partnership was not based in New York City.
Based on the City’s proposed position, the Department intends to attribute expenses incurred by the Management Partnership to the Carried Interest Partnership, thereby disallowing expenses currently deductible for UBT purposes by the Management Partnership. It is the Department’s contention that IRC Section 482, Allocation of Income and Deductions, supports the proposed position.
For more information on New York City’s proposed UBT changes or other state and local tax matters, please contact Warren Abkowitz, CPA, JD, a J.H. Cohn partner and member of the Firm’s Financial Services Industry Practice, at wabkowitz@jhcohn.com or 973-618-6269, or Corey L. Rosenthal, JD, a J.H. Cohn director and member of the Firm’s State and Local Tax Practice, at crosenthal@jhcohn.com or 646-625-5729.
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