tax reporting and reconciliation of hedge fund and other...
TRANSCRIPT
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Tax Reporting and Reconciliation of Hedge Fund
and Other Alternative Investment Fund K-1s Navigating Footnotes and Tying Information to the Tax Return
MAY 21, 2015, 1:00-2:50 pm Eastern
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Tax Reporting and Reconciliation of Hedge Fund and Other Alternative Investment Fund K-1s
May 21, 2015
Andrew L. Plourde
KPMG
Stephen Ng
Kaufman Rossin
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Notice
ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY
THE SPEAKERS’ FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY
OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT
MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR
RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN.
You (and your employees, representatives, or agents) may disclose to any and all persons,
without limitation, the tax treatment or tax structure, or both, of any transaction
described in the associated materials we provide to you, including, but not limited to,
any tax opinions, memoranda, or other tax analyses contained in those materials.
The information contained herein is of a general nature and based on authorities that are
subject to change. Applicability of the information to specific situations should be
determined through consultation with your tax adviser.
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Tax reporting and
reconciliation of
hedge fund K-1s
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 7
What is a hedge fund?
■ What is a hedge fund?
– Open ended investment partnership
– Private Offering – not public, often have requirements such as accredited investors or qualified purchasers
– Can also be defined as what it is NOT
■ Private Equity Fund – closed end investment partnership
■ Mutual Fund – C corp entity that is publicly traded and meets certain requirements such as diversification/income tests
in order to avoid an entity level tax
– Does not actually have to “hedge” anything.
■ A traditional “hedge” fund is one with a long/short strategy that has a market neutral approach – buying long and short
positions in the same industry
■ Often seek “absolute” return as opposed to “relative” return
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Common hedge fund
structures
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 9
Traditional master/feeder structure
Master Fund
Onshore
Feeder
(Delaware LP)
Offshore Feeder
(Cayman Corp)
GPManagement
Company
Incentive Fee
(Expense to Corp.)
Management
Fees
US Taxable
Investors
US Tax-Exempt
and Non-US
Investors
Incentive Fee
(Reallocation
of Profits)
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 10
Fund of fund structure (Domestic)
Underlying Fund
(Delaware L.P.)
3rd
Party
Fund of Funds
(Delaware L.P.)
Fund of Fund
(Delaware L.P.)
Underlying Fund
(Delaware L.P.)
Underlying Fund
(Delaware L.P.)
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Trader vs. Investor
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 12
Trader vs. Investor classification
■ The trader vs. investor classification is an important distinction that is relevant to the treatment of the fund expenses and
the opportunity to use the mark-to-market method of accounting.
■ Taxpayers who buy and sell securities can be “dealers,” “traders,” or “investors”
– Dealers maintain inventory and sell to customers
– Hedge funds generally do not have “customers” and so cannot be considered dealers
■ Accounting for management fees
– “Traders” deduct as section 162 business expenses
– “Investors” treat as production of investment income expensed under section 212 and deducted by individual partners as
miscellaneous itemized deduction
■ No definition of “trader” or “investor”
■ Facts and circumstances test
■ Taxpayer must be engaged in trade or business
– Must be regular and continuous. Comm’r v. Groetzinger, 480 U.S. 23 (1987)
– Traders are in and out of the market seeking profit from movement in prices. Higgins v. Comm’r, 312 U.S. 212 (1941);
Liang v. Comm’r, 23 T.C. 1040 (1955)
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 13
Trader vs. Investor
■ What to look for?
– Box 1, 11 code F or 13 code W – trade or business deductions
– Box 13 code K – portfolio deductions
– Cover letter or Footnote – partnership has been determined to be a “trader in securities” or is in the “trade or business” of
trading securities.
■ Trading securities for own account or trading securities under Treas. Reg. 1.469-1T(e)(6) is not definitive
– Box 13 code H – trade or business interest expense
– Box 13 code H footnote – amount to Schedule E
■ What about fund of funds?
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Trader K-1s
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 15
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 16
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 17
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 18
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 19
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 20
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 21
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 22
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 23
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 24
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 25
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 26
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Investor K-1s
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 28
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 29
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 30
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 31
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 32
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 33
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 34
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 35
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 36
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Fund of fund k-1s
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 38
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 39
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© 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member
firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 40
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firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. NDPPS 379312 41
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Fund of fund k-1 – reconciliation to Form 1040
k-1 Box # Amount reclass Amount 1040/Schedule line
1 – 475(f) gain/(loss) form 4797, part II, line 10 and 1040, line 14
1 – Passive income/(loss) schedule E, pt II, col. G or F
1 – interest, dividend, expense, etc. various
5 – interest income 45,696 96,902 142,598 schedule B, line 1
6a– dividend income 17,817 24,466 42,283 schedule B, line 5
11A – 988 income/(loss) (21,915) 4,039 (17,876) schedule E, pt II, col. H or 1040, pg 1, line 21
11A – other Portfolio Income 7,811 7,811 schedule E, pt II, col. J
11E – cancellation of debt 10,942 10,942 schedule E, pt II, col. G and form 8582, line 3a
11F – ordinary 475(f) gain/(loss) 95,066 95,066 form 4797, part II, line 10
11F – nonqualified dividend 10,025 (10,025) –
11F – qualified dividend 14,441 (14,441) –
11F – U.S. gov’t interest income 5,214 (5,214) –
11F– other interest income 91,688 (91,688) –
11F – 988 income/(loss) 4,039 (4,039) –
11F – trade or bus interest expense – schedule E, pt II, col. H
11F – trade or business expense (78,680) (78,680) schedule E, pt II, col. H
11F – other ordinary income/(loss) 11,954 11,954 schedule E, pt II, col. J
13H – int expense – investing activities (10,175) (10,175) form 4952, and schedule A, line 14
13H – int expense – trading activities (46,622) (46,622) form 4952, and schedule E, pt II, col. H
157,301 – 157,301
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Aggregating schedule k-1s
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Tax basis schedule
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Thank you
Stephen Ng
Kaufman Rossin Fund Services
1270 Avenue of the Americas
Ste 2115
New York, NY 10020
516-673-4899
Andrew L. Plourde
Managing Director, Tax
KPMG LLP
Two Financial Center
60 South Street
Boston, MA 02111
617-988-5918
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The KPMG name, logo and “cutting through complexity” are registered trademarks or
trademarks of KPMG International.