With his decision in Loper Bright Enterprises v. Raimondo, the Supreme Court ended a 40-year precedent established by the case of Chevron USA Inc. v. Natural Resources Defense CouncilInc. to show deference to regulatory agencies in interpreting the legislation they administer.

Although neither case is a tax case, the decision in Loper has broad implications for the tax regulations written and administered by the Treasury Department and the IRS as well as the agencies responsible for tax regulation. the alternatives industry.

Under Chevron, regulatory review took a two-step approach:

1. Determining whether there is ambiguity in the wording of the law and, if so,
2. Whether the regulatory agency has provided a permissible interpretation of the law.

To the extent that both conditions were met, the agency’s interpretation of the statute would be given deference, even if that interpretation was not the one arrived at by the courts. Over the years, the ambiguity of the wording of the law began to be made obvious, leaving it to the courts to determine the reasonableness of the interpretation given by the agencies.

Loper intends to entrust the courts with the task of determining the best (as opposed to permissible) interpretation of the legislation. The Loper decision is likely to have broad implications for tax regulation and administration and provide opportunities for taxpayers, while creating a more uncertain regulatory environment. Regarding the relevant tax provisions for alternative investment companies, two could be specifically affected.

Section 1061 of the Code was enacted by the Tax Cuts and Jobs Act of 2017 and seeks to limit carried interest earned by managers of alternative funds taxed at long-term preferential rates to amounts derived from the sale of assets held for more than three years. Although simple in appearance, the details of achieving the objective of the legislation are quite complex and have been largely left to regulatory discretion.

One of the exceptions provided in the Code, by section 1061(c)(4)(A), is the exception for carried interest held by a corporation. On its face, based on a plain reading of the statute, the exception means that the provisions of Section 1061 should not apply to carried interests held by a corporation. However, section 1.1061-3(b)(2)(i) of the regulations was issued to interpret section 1061(c)(4)(A) and provides that the exception should not apply to a corporation that has elected to be treated as an S corporation or a passive foreign investment company that has elected to qualify as a qualified elective fund.

Although many commenters have expressed the view that excluding certain corporations from the definition of a corporation for purposes of section 1061 by regulation constitutes an overbreadth and is contrary to the plain reading of the statute, until now, taxpayers have been reluctant to take positions contrary to the law. settlement or to take legal action. As with other positions taken against the regulations, taxpayer decisions regarding the application of Section 1061 regulations may need to be reconsidered in light of the Loper decision. Without the same deference given to Treasury’s interpretation of legislative intent and the statute, courts may take a broader view of what “corporation” means for purposes of Section 1061. And the government, for its part, may have to take legislative measures. whether its true intention was to exclude certain companies from the exception provided for in article 1061.

The other area to watch of particular interest to alternative asset managers is the saga surrounding regulations under IRC Section 1402(a)(13). Generally speaking, section 1402(a)(13) exempts income earned by limited partners from self-employment taxes. Alternative asset managers, most often structured as limited partnerships, have relied on this exemption to exempt a large portion of their net management fees from self-employment tax. The struggle to define “sponsor” for purposes of Section 1402 was undertaken by the Treasury when it issued proposed regulations in 1997 and by the courts on numerous occasions, but most recently in the Soroban Capital case Partners v.

Regulations proposed in 1997 attempted to provide a functional test to determine whether an individual was a limited partner for purposes of Section 1402. These regulations were withdrawn after the Senate specifically expressed concerns that the proposed regulations overstepped Treasury regulatory authority and indicated that “Congress, not the Treasury Department or the Internal Revenue Service, should determine the tax law governing self-employment income for limited partners.”

In Soroban, the court chose to pursue the functional analysis to determine whether the asset managers’ limited partners were limited partners for purposes of section 1402(a)(13), and recently held that they were not. The IRS did, however, include regulation under section 1402(a)(13) on its priority guidance plan for fiscal year 2023-2024. The year ended June 30, 2024 and the plan for the 2024-2025 fiscal year has not yet been released, but if independent work for sponsors, the orientation remains on the priority orientation list, and the IRS actually undertakes the task of providing regulations defining a limited partner, there could be tension between the impact that the Loper and Soroban decisions would have on the direction the IRS takes in its rulemaking. It may also sow further confusion among managers of asset management companies (as well as other service-type businesses operating as limited partnerships) and remind Congress that it has indicated that guidance on this matter must have come from them.

Although the Loper decision does not provide any clarity or guidance on the complex and uncertain tax issues facing alternative asset companies, it could provide taxpayers with the opportunity to refine and redefine their tax situation in cases where Current or future tax regulations do not provide the best interpretation. status.