Alerts

Proposed Regulations Under Section 409A May Impact Managers of Funds with Side Pockets

December 2, 2005

Section 409A of the Internal Revenue Code of 1986, as amended ("Section 409A"), was introduced by the American Jobs Creation Act of 2004 (the "Act"). Section 409A contains new rules governing compensation deferred after December 31, 2004, including any amount that is earned or that vests after December 31, 2004.

Proposed regulations recently issued by the IRS and the Treasury Department specifically apply Section 409A to a cash basis taxpayer who provides management services, including a financial adviser to a hedge fund.

Deferred compensation under Section 409A generally means a payment to a service provider (e.g., the manager) by the recipient of its services (e.g., the fund) in a year following the taxable year in which the service provider obtains a legally binding right to the compensation. A manager typically has a legally binding right to a management fee in the calendar year during which such fee accrues.