It has now been almost two months since the IRS issued Notice 2014-67 and the initial euphoria of tax lawyers across the country has begun to wane. (To relive that excitement, please visit our posts of October 24, October 28 and November 5, reporting the new opportunities created by this Notice.) Today we return to the Notice for two purposes.
First, we have prepared and attached a copy of Rev. Proc. 97-13 with the “modifications” made by Rev. Proc. 2001-39 and “amplifications” made by Notice 2014-67 highlighted in the Revenue Procedure. We hope this document eases your holiday season review of those last-minute management contracts presented to you on the eve of your year-end closings.
Second, we present the following challenge: We would like to hear from anyone who has seen a contract that satisfies any of Section 5.03(4) (50% periodic fixed fee arrangements), 5.03(5) (Per-unit fee arrangements in certain 3-year contracts) or 5.03(6) (Percentage of revenue or expense fee arrangements in certain 2-year contracts), but does not satisfy the new 5.03(7). It might just be that there are no such contracts. Whether that is correct or not, if the IRS reaches this conclusion, paragraphs (4), (5) and (6) may well be eliminated in the next round of management contract guidance. So it is incumbent upon all readers of this blog to think as creatively as possible to identify those contracts still benefitting from any of those three paragraphs with the objective of sharing that information with the IRS.
While we have not yet seen such a contract, we note that the potential exists for continuing benefit from paragraph (4) (see our October 28 post). That paragraph requires that at least 50% of the annual compensation under the contract consist of a fixed fee, with no limitations on the remainder of the compensation (other than the ubiquitous prohibition against a share of net profits). Thus if there are forms of compensation other than those listed in new paragraph (7), a contract providing that excluded form of compensation could benefit from paragraph (4). And while that list in paragraph (7) looks quite complete, the fact that the IRS bothered to list those forms of compensation suggests that there might be – or at least that the IRS thought there might be – forms of compensation not on that list. So with these thoughts, we solicit your suggestions as to whether any or all of paragraphs (4), (5) or (6) have a continuing purpose.
We hope you won’t spend all of your holidays focused on this question, and that you and your families will share the non-103 pleasures of the season. To that end, this is our last regularly scheduled post for 2014 – our next scheduled post will be on Wednesday, January 7, 2015. We will post alerts of any breaking developments that occur in the interim.