FIN 48: headaches for hedge fund tax compliance function

The purpose of this paper is to explain some tax management complications for onshore and offshore hedge funds posed by US FIN 48, Uncertain Tax Positions, and to emphasize the hedge fund manager's responsibility for careful tax planning and compliance.

The paper discusses a hedge fund's objective to deliver tax‐efficient results to investors, explains the background of FIN 48, and illustrates five types of situations in which conservative auditors following FIN 48 may raise “red flags.”

With the advent of FIN 48's standards careful tax planning and compliance are more important than ever for a hedge fund. Significant complications may arise from unwise, tardy, or missed tax elections; filing an IRS Form 8275, Disclosure Statement, stating that a fund is using a method of accounting contrary to IRS regulations; or having a business construed for US tax purposes as a finance company operating in the USA. Hedge fund managers need to know the rules concerning interest expense exceeding interest income and expenses paid by investors in a fund of funds.

The paper provides practical guidance from an experienced securities and hedge fund lawyer.