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Bailey McCann, Opalesque New York

New York City has long held a reputation as America's financial center. The city is home to major exchanges, banks and some of the world’s largest hedge funds. Indeed, the city's mayor Michael Bloomberg made a name for himself providing services for financial professionals. However, this may be changing as city finance officials have opted to abruptly reassess how they collect taxes from hedge funds.

I spoke with Alexis Gelinas, Attorney at New York based law firm Sadis & Goldberg LLP, about the shift and its potential impact.

As several alternative management companies went through November audits, accounting firms Ernst & Young and PriceWaterHouseCoopers were suddenly faced with changes in what expenses the New York City Department of Finance was going to allow funds to deduct.

Currently, management companies of hedge funds have operated in a tiered structure that gives management fees to the investment manager and an incentive allocation to the general partner. This allocation usually results from capital gains income, or other investment or trading income. Typically, hedge funds pay an unincorporated business tax on management fees but not incentive allocations. This structure was the result of explicit statute outlined by the Department over 15 years ago.

Within the existing structure, investment managers normally deduct the same expenses reported on their federal income tax as they do in calculating the in......................

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