“An ounce of prevention is worth a pound of cure.” – Benjamin Franklin
- Purchasing an NPL pool – do I need to worry about the IRS? Yes. Whether you like it or not, the IRS is one of your economic partners in the trade. Structuring the acquisition, ownership, financing, securitization and/or disposition of an NPL pool requires at least as much of your attention as negotiating economic terms with your business partners. Listening to your tax advisors may put you to sleep, but you’ll sleep soundly knowing they put money into your pocket.
- Why do I need to worry about the IRS? The IRS’s share of your economic profits depends in part on the assets you own, the activities you conduct and your tax status (and possibly the tax status of your investors). The IRS’s share may be significant. For example, the IRS’s share of profits from an NPL pool owned by a non-US corporation may rise to 54.5%. Think about that for a second – if the NPL pool generates $1M net income, the IRS may take $545,000 and the non-US corporation may take only $455,000. Therein lies the value for creating a tax-efficient structure.
- What investors have the most tax sensitivities? Investors with the most tax sensitivities for an NPL investment include non-US investors, tax-exempt organizations (including pension funds), REITs, and investment funds with any of these types of investors.
- What tax sensitivities do these investors have? Ownership and active management of an NPL pool may cause the owners of the NPL pool to be engaged in a lending or financing business. In very general terms, this may trigger tax liability for non-US investors, tax-exempt organizations (including pension funds), and REITs investing directly in the NPL pool or indirectly through an investment fund. In addition, ownership and active management of an NPL pool may cause these non-US investors and tax-exempt organizations (including pension funds) to file US federal income tax returns when they may not otherwise be required to do so. In other words, anonymity may be lost for non-US investors. REITs may have additional tax issues, such as phantom income, liquidity and difficulty meeting REIT distribution requirements.
- Do you have a silver-bullet one-size-fits-all investment structure? No. For example, you wouldn’t want to drop an NPL pool into a US “blocker” corporation that is owned equally by non-US investors and taxable US investors. Sure, the US corporation would help solve the “anonymity” problem for non-US investors that I mentioned above; however, running the taxable US investors’ share of profits from the NPL pool though the corporation (taxed at a 35% US federal income tax rate) unnecessarily reduces their after-tax return. Don’t be the one who makes this mistake.
- What will you do for me? Pick up the phone and call me. I’m intimately familiar with marketplace trends as well as the myriad unique tax issues raised by NPL pool acquisition, ownership, financing, securitization and disposition by tax-sensitive investors. I’ll design a bespoke investment structure tailored to your unique investment strategy to minimize – and possibly eliminate – the unnecessary costs of your IRS partner.
Todd S. Anderson
Direct Dial: 646-942-0311
61 Massachusetts Avenue, PO Box 205, Hyannis Port, MA 02647