Independent Sponsor Closing Fees - Tax Free Contribution?

April 11, 2025

by a searcher from Indiana University, Bloomington/Indianapolis - Kelley School of Business in Chicago, IL, USA

Hi all - have any folks here structured a deal along the lines of an independent sponsor model (e.g., closing fee, promote/carry, management fee), where the closing fee of $X that was paid to the Sponsor is contributed/rolled into the transaction in a tax free / tax deferred manner? For example, the Sponsor raises $5m of equity co-investment from LP's, and receives a $500k closing "fee". The sponsor contributes 100% of the $500k into the transaction. Thus, the total cash contribution to the transaction is $5.5m ($5m LP equity co-investment + $500k from the sponsor). Both the LP's and the Sponsor purchase the same participating preferred security (LP's effectively hold 90.9%, while Sponsor effectively holds 9.1%). Importantly, the objective is for the Sponsor to avoid paying taxes on this $500k "fee" given it was "rolled" into the transaction. Obviously receiving $500k of value, but tying up all of that value into the transaction will become materially problematic if the Sponsor needs to pay taxes on the $500k of "fees". To the extent any of you have successfully structured this type of closing fee arrangement in such a tax free way, I'd love to connect to learn more about the specifics.

Reply by a professional
from Northwestern University in Chicago, IL, USA

I’m not a tax lawyer, but I agree with Robert that the safer route is to structure this as a profits interest or at least that’s what I’ve commonly seen in the PE fund world, where management fees are sometimes offset or tied to a profits interest structure. You can do what Katten describes, but that approach is more fact-dependent. You’d need to form the entity early, ideally contribute some capital (even a nominal amount) and clearly document the sponsor’s efforts, LOI, diligence, lender engagement, etc. Once third-party capital is raised and the transaction closes, any resulting dilution could be respected as a shift from a preexisting interest to a new capital structure. But IRS scrutiny will focus on whether that interest was effectively earned for services. Also worth flagging: this doesn't appear to be a transaction-based fee, which is important. If it were, that could potentially trigger broker-dealer issues, and that part often gets overlooked in sponsor deals.

Reply by a professional
from University of Illinois at Chicago in Chicago, IL, USA

Hi Joe - hope all is well. We have done this many times for our independent sponsor clients. There are a few approaches, but the most common is to issue profits interests with a deemed capital contribution equal to the rolled fee. There are nuances and technical aspects to this but is a common approach in independent sponsor deals. Happy to discuss further on a call. Feel free to DM or email me at redacted

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