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

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  • Edition: 1st
  • Format: Hardcover
  • Copyright: 2010-08-02
  • Publisher: Wiley
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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

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

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