Logical Formulas works with hedge funds and private equity investors. Its principal, Jeffrey J. Lonsdale, CPA (Illinois), MST, MBA, MSA, has extensive experience in working with hedge funds and private equity investors. Logical Formulas provides tax due diligence and tax-related investment restructuring. We help the investor avoid predictable financial accidents waiting to happen.
Pension Plans, University Endowments, Foundations and Foreign Investors
Many of the largest investors in hedge fund/venture capital/private equity funds are pension plans and university endowments. Often as U.S tax-exempt investors, pension plans and university endowments are completely unaware of certain U.S. tax risks believing they are protected by the U.S. Passive Foreign Investment Company (PFIC) regime when they invest in foreign entities and foreign feeders. This belief might not be completely true. Foreign investors have similar issues. As a group, these investors may not be aware that pre-existing "fund specific" tax risk can be inherited by simply subscribing to a PROBLEM FUND. Even sophisticated investors find it difficult to pinpoint hidden tax risks because FASB Interpretation (FIN) 48 allows hedge funds and private equity funds to carry significant contingent tax liabilities on their books without disclosure to the investor.
Avoid Traveling Tax Risk
This means that certain TRAVELING TAX RISKS are indigenous to the entity itself. Such risks are not taxed to the investor under the flow-through approach and therefore stay with the fund -- even if the fund is a PFIC. These fund specific tax risks (with inherent sudden NAV destroying potential) travel from old investors to new investors as old investors redeem and the new investors subscribe. Traveling Tax Risks would include (1) fund-specific withholding tax risk on inbound U.S. investment returns, (2) target U.S. investment debt to equity re-characterization risk (3) U.S. trading safe harbor violations by a fund (4) failure of a fund to report the fund's U.S. trade or business risk (5) U.S. loan origination business risk (6) portfolio interest rule violation risk -- to name a few.
· Are you making investment decisions as a fiduciary?
· Did you perform adequate tax due diligence?
· Are you exposed to unnecessary liability?
· Are you sure?
· How do you know?
Just because tax risks are described in the Private Placement Memorandum (PPM) does not mean that the fund manager actually operates the fund to minimize tax risk for the investor.
How Logical Formulas Can Help You
We identify, diagnose and correct undisclosed CONTINGENT TAX RISK. We also help our clients diagnose the potential for TAX RISK SHIFT which results when tax risks and related legal fees from tax audits shift the obligation to pay the tax from one investor to an unsuspecting remaining investor. We have designed risk restructuring solutions which will minimize the negatives and maximize the positives.
We are also accomplished in working on behalf of investors to cause managers to implement fundamental changes in their operating procedures. Investors vexed by managers invoking the big time surprise of hedge fund “gates” and “force majeur” provisions will be very impressed about how we can help here.
Don't Wait -- Act Now
Be safe. Logical Formulas can significantly minimize the investor's contingent tax risk by working on your behalf with the fund manager to restructure the form of your investment to reduce your risk of being stuck with a disproportionate share of the fund's tax liability. Possible solutions include moving the investor from direct fund investment into risk-controlled managed accounts, combined with tailored risk-protecting swap strategies.
New Economic Conditions Demand Different Investment Solutions
Now might be the best time to redeem your investment in a fund. Perhaps shifting your investment to a managed account in the same fund strategy (but with better tax controls) might be the best way to manage hidden tax risk.
Don't Be the Last Remaining Investor Saddled with Departed Investor's Residual Tax Risks
Tax-exempts and foreign investors that invest in foreign entities and foreign feeders are particularly vulnerable because the PFIC rules do not transfer all U.S. tax risks of the fund up to the original tax owner. Certain contingent tax risks remain in the fund when other investors depart.
Imagine being the last remaining investor in a hedge fund or private equity fund ... and owning a disproportionately large share of an IRS tax audit bill that should belong to the former investor. Let us help you plan now to avoid such an unfortunate result -- before a tax audit actually occurs.
Now is the time to engage Logical Formulas to perform a due diligence and fund structure review of your investments.
Cost effective structuring solutions for all of your financial needs
Individual and corporate taxes
4516 Lovers Lane #122
Dallas, TX 75225
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