IRS Issues Guidance Limiting Tax Benefits Associated With Asset-Based Fees
PDF version On May 25, 2007, the Internal Revenue Service (IRS) issued guidance regarding the tax treatment of fees paid in accounts that charge flat percentage fees instead of transaction-based commissions. Under the IRS guidance, investors must treat the flat fees as miscellaneous itemized deductions and may not include such fees in the basis of the securities held in the account. The practical effect of this guidance may be to limit the tax benefits that investors in accounts that charge asset-based fees may claim in connection with the flat fees associated with such accounts.
In Chief Counsel Advice Memorandum 200721015 (CCA) released on May 25, 2007, the IRS considered how investors who paid flat fees in connection with accounts that charge asset-based fees should treat such fees for certain federal income tax purposes. The fees were a substitute for (1) brokerage commissions, (2) financial consultancy compensation, (3) custodian charges, and (4) account management fees. In the past, some investors have capitalized similar fees, thereby increasing their cost basis in the account securities and, correspondingly, reducing their exposure to capital gains taxes on the ultimate sale or exchange of the securities. The IRS concluded that the flat fees should not be capitalized but, instead, should be currently deducted as miscellaneous itemized deductions, which are permitted only to the extent that such deductions exceed 2% of the taxpayer’s adjusted gross income.
A CCA is generally regarded as representing only modest authority concerning tax issues, relative to the myriad of other IRS published pronouncements. However, this CCA serves as an indication of the IRS’s position on an issue in which authority has otherwise been lacking.
Investment Management FYI is a service of the Investment Management Practice of Morgan Lewis. If you have any questions concerning these important legal developments, please contact any of the following Morgan Lewis attorneys:
Philadelphia
Timothy W. Levin
William P. Zimmerman
Washington, D.C.
Jeffrey S. Korenblatt
Steven W. Stone
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