tax reporting and reconciliation of hedge fund and other...

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

[email protected]

Stephen Ng

Kaufman Rossin

[email protected]



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.

Tax reporting and

reconciliation of

hedge fund K-1s

© 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

Common hedge fund

structures



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)



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.)

Trader vs. Investor



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)



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?

Trader K-1s

Investor K-1s

Fund of fund k-1s



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

Aggregating schedule k-1s

Tax basis schedule

Thank you

Stephen Ng

Kaufman Rossin Fund Services

1270 Avenue of the Americas

Ste 2115

New York, NY 10020

[email protected]

516-673-4899

Andrew L. Plourde

Managing Director, Tax

KPMG LLP

Two Financial Center

60 South Street

Boston, MA 02111

[email protected]

617-988-5918

© 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

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