Alerts

New Legislation Limiting Deferral of Offshore Compensation Proposed; Side Pocket Incentive Fees May Be Significantly Impacted

May 20, 2008

On May 15, 2008, the House Ways and Means Committee approved for inclusion in the “Energy and Tax Extenders Act of 2008” (H.R. 6049) new limitations on the ability of a cash-basis taxpayer to defer compensation earned from many non-U.S. corporations (including offshore hedge funds) and certain partnerships not comprised primarily of taxable U.S. persons (“nonqualified entities”). (See “Legislation Introduced to Limit Deferrals of Compensation from Many Offshore Corporations” regarding a previous proposal that passed the House but stalled in the Senate in December 2007.) If enacted, the legislation would be effective with respect to the deferral of fees earned from services performed after Dec. 31, 2008. Existing deferrals, and earnings on existing deferrals, would generally be required to be included in the service provider’s income no later than 2017. A special rule would allow taxpayers to make a charitable contribution of such deferred amounts in 2017 without being subject to certain charitable contribution limits.