Tax Reporting and Reconciliation of Hedge Fund and Other Alternative Investment Fund K-1s

Tax Reporting and Reconciliation of Hedge Fund and Other Alternative Investment Fund K-1s Navigating Footnotes and Tying Information to the Tax Return MAY 21, 2015, 1:00-2:50 pm Eastern IMPORTANT INFORMATION This program is approved for 2 CPE credit hours. To earn credit you must: Participate in the program on your own computer connection (no sharing) if you need to register additional people, please call customer service at 1-800-926-7926 x10 (or 404-881-1141 x10). Strafford accepts American Express, Visa, MasterCard, Discover. Listen on-line via your computer speakers. Respond to five prompts during the program plus a single verification code. You will have to write down only the final verification code on the attestation form, which will be emailed to registered attendees. To earn full credit, you must remain connected for the entire program. WHOM TO CONTACT For Additional Registrations: -Call Strafford Customer Service 1-800-926-7926 x10 (or 404-881-1141 x10) For Assistance During the Program: -On the web, use the chat box at the bottom left of the screen If you get disconnected during the program, you can simply log in using your original instructions and PIN.

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Tax Reporting and Reconciliation of Hedge Fund and Other Alternative Investment Fund K-1s May 21, 2015 Andrew L. Plourde KPMG aplourde@kpmg.com Stephen Ng Kaufman Rossin sng@kaufmanrossin.com

Notice ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY THE SPEAKERS FIRMS TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF (i) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR (ii) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and your employees, representatives, or agents) may disclose to any and all persons, without limitation, the tax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

Tax reporting and reconciliation of hedge fund K-1s

What is a hedge fund? What is a hedge fund? Open ended investment partnership Private Offering not public, often have requirements such as accredited investors or qualified purchasers Can also be defined as what it is NOT Private Equity Fund closed end investment partnership Mutual Fund C corp entity that is publicly traded and meets certain requirements such as diversification/income tests in order to avoid an entity level tax Does not actually have to hedge anything. A traditional hedge fund is one with a long/short strategy that has a market neutral approach buying long and short positions in the same industry Often seek absolute return as opposed to relative return 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 379312 7

Common hedge fund structures

Traditional master/feeder structure US Taxable Investors GP Management Company US Tax-Exempt and Non-US Investors Incentive Fee (Reallocation of Profits) Incentive Fee (Expense to Corp.) Onshore Feeder (Delaware LP) Management Fees Offshore Feeder (Cayman Corp) Master Fund 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 379312 9

Fund of fund structure (Domestic) Fund of Fund (Delaware L.P.) 3 rd Party Fund of Funds (Delaware L.P.) Underlying Fund (Delaware L.P.) Underlying Fund (Delaware L.P.) Underlying Fund (Delaware L.P.) 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 379312 10

Trader vs. Investor

Trader vs. Investor classification The trader vs. investor classification is an important distinction that is relevant to the treatment of the fund expenses and the opportunity to use the mark-to-market method of accounting. Taxpayers who buy and sell securities can be dealers, traders, or investors Dealers maintain inventory and sell to customers Hedge funds generally do not have customers and so cannot be considered dealers Accounting for management fees Traders deduct as section 162 business expenses Investors treat as production of investment income expensed under section 212 and deducted by individual partners as miscellaneous itemized deduction No definition of trader or investor Facts and circumstances test Taxpayer must be engaged in trade or business Must be regular and continuous. Comm r v. Groetzinger, 480 U.S. 23 (1987) Traders are in and out of the market seeking profit from movement in prices. Higgins v. Comm r, 312 U.S. 212 (1941); Liang v. Comm r, 23 T.C. 1040 (1955) 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 379312 12

Trader vs. Investor What to look for? Box 1, 11 code F or 13 code W trade or business deductions Box 13 code K portfolio deductions Cover letter or Footnote partnership has been determined to be a trader in securities or is in the trade or business of trading securities. Trading securities for own account or trading securities under Treas. Reg. 1.469-1T(e)(6) is not definitive Box 13 code H trade or business interest expense Box 13 code H footnote amount to Schedule E What about fund of funds? 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 379312 13

Trader K-1s

Investor K-1s

Fund of fund k-1s

Fund of fund k-1 reconciliation to Form 1040 k-1 Box # Amount reclass Amount 1040/Schedule line 1 475(f) gain/(loss) form 4797, part II, line 10 and 1040, line 14 1 Passive income/(loss) schedule E, pt II, col. G or F 1 interest, dividend, expense, etc. various 5 interest income 45,696 96,902 142,598 schedule B, line 1 6a dividend income 17,817 24,466 42,283 schedule B, line 5 11A 988 income/(loss) (21,915) 4,039 (17,876) schedule E, pt II, col. H or 1040, pg 1, line 21 11A other Portfolio Income 7,811 7,811 schedule E, pt II, col. J 11E cancellation of debt 10,942 10,942 schedule E, pt II, col. G and form 8582, line 3a 11F ordinary 475(f) gain/(loss) 95,066 95,066 form 4797, part II, line 10 11F nonqualified dividend 10,025 (10,025) 11F qualified dividend 14,441 (14,441) 11F U.S. gov t interest income 5,214 (5,214) 11F other interest income 91,688 (91,688) 11F 988 income/(loss) 4,039 (4,039) 11F trade or bus interest expense schedule E, pt II, col. H 11F trade or business expense (78,680) (78,680) schedule E, pt II, col. H 11F other ordinary income/(loss) 11,954 11,954 schedule E, pt II, col. J 13H int expense investing activities (10,175) (10,175) form 4952, and schedule A, line 14 13H int expense trading activities (46,622) (46,622) form 4952, and schedule E, pt II, col. H 157,301 157,301 2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 379312 65

Aggregating schedule k-1s

Tax basis schedule

Thank you Stephen Ng Kaufman Rossin Fund Services 1270 Avenue of the Americas Ste 2115 New York, NY 10020 sng@kaufmanrossin.com 516-673-4899 Andrew L. Plourde Managing Director, Tax KPMG LLP Two Financial Center 60 South Street Boston, MA 02111 aplourde@kpmg.com 617-988-5918

2015 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved. NDPPS 379312 The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International.