Taxation of U.S. Investment Partnerships and Hedge Funds Accounting Policies, Tax Allocations, and Performance Presentation

by Vasavada, Navendu P.

• ISBN13: 9780470605752
• ISBN10: 0470605758
• Edition: 1st
• Format: Hardcover
• Copyright: 2010-08-02
• Publisher: Wiley

Summary

A new, lucid approach to the formulation of accounting policies for tax reportingUnraveling the layers of complexity surrounding the formulation of accounting policies for tax reporting, Taxation of US Investment Partnerships and Hedge Funds: Accounting Policies, Tax Allocations and Performance Presentation enables your corporation to implement sound up-front accounting and tax policies in order to reduce the overall cost of CFO and legal functions within a U.S. Investment partnership. Understand the pitfalls and optimize across legitimate policies that are consistent with the IRS regulations Presents a clear roadmap for accounting, tax policies, tax filing and performance presentation for US investment partnerships and hedge fundsProviding tremendous understanding to a complex topic, Taxation of US Investment Partnerships and Hedge Funds is guaranteed to demystify the inner workings of the formulation of accounting policies for tax reporting.

Author Biography

NAVENDU P. VASAVADA, PhD, has held the positions of investment manager of large institutional investors, manager of private hedge funds, an economic analyst, and writer-at-large. He was formerly a senior investment manager at Aetna Inc. for over a decade, serving as head of quantitative research, risk manager, mortgage securities analyst, and equity/fixed income derivatives quant. He holds a PhD from Wharton, preceded by an engineering MS from the University of Pennsylvania and PGDBA from IIM-A, India.

Table of Contents

Preface	p. xiii
The Arcane World of Hedge Funds and Investment Partnerships	p. 1
What Is a "Hedge Fund"?	p. 1
U.S. Venture Partnerships	p. 3
Types of U.S. Hedge Fund Entities and the U.S. Tax Code	p. 4
Organizing a Typical U.S. Hedge Fund	p. 6
Investor Clienteles in Hedge Funds	p. 10
Foreign Investors in a U.S. Hedge Fund	p. 14
Offshore Funds	p. 14
U.S. Investors in Offshore Funds	p. 17
U.S. Investors in Swiss Bank Accounts	p. 19
U.S. Investors in Madoff-Like Managed U.S. Trading Accounts	p. 23
Size of the Global Hedge Fund Industry	p. 25
Fund-of-Funds	p. 28
Incentives of the Hedge Fund Manager and Investors	p. 30
Valuation of a Hedge Fund Management Company	p. 31
Economies of Scale in Hedge Funds	p. 33
The Structure of Hedge Funds	p. 35
Organizing a Typical Offshore Hedge Fund	p. 35
Master-Feeder Structuring of Onshore/Offshore Arms: Organizing a Hedge Fund for Clienteles	p. 39
U.S. Withholding Agent for U.S. Withholding Taxes on Foreign Investors	p. 44
Hedge Fund Fees	p. 47
Starting Point: The Partnership Agreement	p. 47
Fund Valuation at Discrete Opening Time Points	p. 48
Calculation of Fixed Fees	p. 49
Calculation of Performance Fees	p. 55
Claw-Back Provision: Performance Fee Returned to Limited Partners	p. 66
Representation of a Fund's Net Asset Value (NAV) per share	p. 71
Black-Scholes Formula Valuation of Performance Fees	p. 74
Hedge Fund Accounting and Tax Filing	p. 79
Partnership Accounting for U.S. Funds	p. 79
IRS Tax Return Filings for U.S. Hedge Funds	p. 80
Financial Statements for Hedge Funds and Venture Funds	p. 85
Interim Valuation: The Core of a Hedge Fund's Accounting Operation	p. 93
Books of Account and Financial Statements for Hedge Funds	p. 96
Audit of an Offshore Fund	p. 97
Audit of a U.S. Fund	p. 98
Capital Account Audit for Both Offshore and U.S. Funds	p. 99
Partner Tax Allocations in U.S. Partnerships	p. 101
U.S. Tax Allocation Rules Governing U.S. Partnerships	p. 101
Tax Components of U.S. Investment Partnership Income	p. 103
Fixed Fees: Income to the General Partner and Expense to the Limited Partners	p. 107
Generalizing the Allocation Formula to Other Components of Income	p. 108
Tax Basis of Partner's Investment in a U.S. Partnership	p. 109
Accountants' Terminology	p. 113
Tax Allocations of Realized and Unrealized Income to Partners	p. 113
The Tax Allocation Method of Layering	p. 115
Tax Allocation of Interest	p. 118
Tax-Exempt Interest Income, Line 18a	p. 120
Similar Calculation for Tax Allocation of Dividends, Investment Expense, Foreign Tax Paid	p. 121
Tax Allocation of Fixed Fees Paid by Limited Partners	p. 121
Tax Allocation of Guaranteed Payments (of Fixed Fees) to the General Partner	p. 122
Reporting Subcomponents of Interest Income and Dividends	p. 122
Tax Consequences of Shorting	p. 123
Short Positions: Tax Treatment of Equity Dividends or Bond Coupons Claimed as Interest Expense	p. 123
Distributions from Partnerships Owned	p. 124
Tax Allocations of Realized Gains by Layering	p. 127
Tax Allocation of Unrealized and Realized Capital Gains Using the Method of Layering	p. 127
Ignoring Ambiguity #1 with Layering	p. 132
Work-Around to Fix Ambiguity #2, The Fatal Flaw with Layering	p. 133
Partial and Full Netting Methods	p. 137
The Methods of Aggregation or Netting	p. 137
Partial Netting	p. 138
Full Netting	p. 141
Measures of Book-Tax Disparity across Partners	p. 142
Formulating the Problem for Optimal Partner Tax Allocations under Full Netting	p. 143
Formulating the Problem for Optimal Partner Tax Allocations under Partial Netting	p. 146
Solving the Convex Optimization Problem of Tax Allocation	p. 148
Comparative Tax Consequences of Layering and Netting Methods	p. 153
Which Is the Better Method for Allocation of Realized Gains: Layering, Full Netting, or Partial Netting?	p. 153
Layering Examples Showing Earlier Tax Payment	p. 154
Full Netting Examples Showing Tax Postponement	p. 158
Tax Efficiency of Hedge Funds	p. 161
Tax Efficiency Considerations for Offshore Hedge Funds	p. 161
Tax Preference Ordering for U.S. Investors	p. 163
More Attractive Tax Items to U.S. Investors	p. 167
Less Attractive Tax Items to U.S. Investors	p. 169
An Exception: Special Tax Preference for Gains from U.S. Exchange-Traded Futures Contracts	p. 170
Ambiguities in Tax Preference	p. 170
Tax Efficiency Steps for U.S. Hedge Funds	p. 170
A Structure for Tax-Exempt U.S. Entities to Recover Foreign Taxes	p. 173
Hedge Fund Performance and Risk Presentation	p. 175
Performance Presentation: CFA Institute GIPS Verification	p. 175
Calculation of Hedge Fund Returns for Performance Presentation	p. 179
Facilitating Historical Risk and Return Review for Investors Using GIPS Guidelines	p. 183
Mutual Funds and Venture Funds Compared to Hedge Funds	p. 191
Tax Return Filing of U.S. Partnerships Is an Involved Task	p. 191
Comparison with Tax Allocations Made by Mutual Funds	p. 191
U.S. Venture Partnerships (Silicon Valley Venture Funds)	p. 196
Epilogue	p. 203
Economic Accounting Is a Common Denominator for U.S. and Offshore Funds	p. 203
Tax Return Filing of U.S. Partnerships Is an Involved Task	p. 204
Calculating Partner Allocations Is Most of a U.S. Partnership's Tax Accounting Effort	p. 204
Layering and Netting Methodologies for Tax Allocation of Capital Gains	p. 205
Example of Tax Allocation of Capital Gains by Full and Partial Netting in a 100-Partner Setting	p. 205
Tilting Tax Allocations According to Tax Preferences	p. 206
The Crown Jewel: Automated Tax Allocation of All Items of Income	p. 206
The End of an Era of Layering	p. 207
Excerpts of Key U.S. Statutes Discussed in Chapter 1 That Govern U.S. and Offshore Hedge Funds Venture Funds	p. 209
Methodology and Implementation Example of Full Netting	p. 229
Methodology and Implementation Example of Partial Netting	p. 253
Nonabusive Tilting of Tax Allocations According to Tax Preferences	p. 259
Eliminating Layering Entirely, by Allocating Dividends, Interest, Capital Gains, and Expenses in One Step	p. 267
Index	p. 277
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