Anyone manage to make sense out of BlueCrow's QEF statement?

[D3uB (Dave L)]

Even after a round of questions with BlueCrow’s investor relations person, my accountant and I still can’t get the numbers to line up for my US federal tax return. Specifically, I need to figure out what part is the capital gains, what part is ordinary income, and what they did with my “setup fee,” by which I really mean the withholding of a dividend for this year.

Referring to the QEF statement, BC told me (or rather, confirmed my guesses) that:

• “Fair Value Increases” is non-realized capital gains
• “Interest Obtained” plus “Other income” (which I’m calling “gross yield”) minus “Total expenditure” is ordinary income
• My gross yield is reduced by the setup fee of 5% (400 euros/share). Since my “gross yield” is less than the setup fee, my ordinary income is zero

I have some doubts whether this accounting is correct. First of all, if my setup fee comes out of gross yield as they say, doesn’t that mean that everyone who didn’t pay a setup fee this year gains my share of the gross yield? They don’t say how many of us are not getting gross yield, so how would everyone calculate their share?

I don’t really understand where the (net) ordinary income went, minus the dividend payout, that is. Does that come back to us in some form when the fund is liquidated?

To make matters worse, none of these figures explain why my BC dashboard says the value of my investment has gone up 534 euros/share. I can imagine that after 10 years (just being realistic with SEF and MoJ), the QEF numbers I’ve been reporting won’t agree with what BC returns to me, and the IRS won’t be happy!

Can anyone clarify? I’ll try another round of emails with BC if not.

Thanks!

[jb4422 (Jeff B)]

I’m not really 100% that their accounting truly maps correctly to US private equity accounting. For example. Are the management fees actually deductible from income? Not necessarily. You might think that as being obvious, sure. In US private equity, with expenses and income flowing through on a K-1, they actually aren’t - TCJA killed that in 2018 since that always got classified as “investment advice”. However, for a US mutual fund, then yes, they’re hidden in the mechanics of the fund because the fund is not a pass-through entity. I was going to talk to their accounting firm, but just never got to it, and given work as it is this year, I don’t see getting to it. For last year, I just jammed numbers in since they were relatively small and not worth quibbling. This year, I’m just letting my accountant interpret it and walking away.

The setup fee would come out of YOUR gross yield. Just because it’s on your form doesn’t mean it’s on everyone else’s form. Very specifically, it’s not on my form. Your setup fee is your problem.

Net ordinary income is sitting in the fund’s bank account and continues to be part of the overall fair value of the fund. Please remember that the “dividend” you receive really isn’t. You are taxed based on the income of the fund as it receives it. The “dividend” that goes into your bank account is a “return of capital” of sorts, the same mechanics as you see with various ETFs and funds in the US - “we made X, we’re going to keep Z% of it in our bank account and give (X-Z)% to you to put in your bank account”. What is paid out to you reduces your basis. The only difference here is that you don’t have to keep track of your basis - this is being done for you.

The number you see on your custodial statement from your bank for EUR/share is a statement of net fair value of the shares of the fund as of the latest valuation reported by BC to your depository custodian. In this case, that value is dictated by (actual fair value of the assets) + (cash in bank) - (accounts payable), which will have subtracted out anything that was paid out to you - which then of course shows up in your bank account as cash. That will (hopefully) continue to go up as the fair value of the assets goes up.

If/when BC sells an asset, some of that “unrealized fair value” will become realized, and show up as “cap gain”. Which you will then pay taxes on at the time of realization.

Eventually, you will cash in the shares. Perhaps surprisingly to you, you won’t owe any taxes at that point (except for any gains in the last year) - because you already paid them along the way. It all comes out in the wash.

And if you’re wondering about that 10%(?) incentive fee - for all that the wording would seem to indicate that that’s a cut they’re taking at the end… it’s not. It’s baked into the fee as you go along. The mechanics of this, I do not understand - however, I can state this with certainty as this is how I have experienced this working in practice. I could ask my CFO if people really cared. (And yes, the management fee can actually be negative in the case of losses, to claw that incentive back. Again, I have seen this in practice.)

And yes, you are making a very long term loan to the US Treasury as a result of this. You can claim this is unfair, but that is how this works, and it is not somehow unique to PFICs - this is how this works for all PE in the US.

[D3uB (Dave L)]

Thanks, Jeff! You are so helpful, as always!

@jb4422

For example. Are the management fees actually deductible from income? Not necessarily.

This level of accounting is well beyond my ability to know that I’m doing it right, and I’m pretty sure it’s beyond my accountant’s as well, considering the numbers he tried to fill in. I think I’m resigned to claiming all the expenses and let my IRS auditor sort out the details during my audit. At least I have the email from BC claiming I did it right.

@jb4422

The setup fee would come out of YOUR gross yield. Just because it’s on your form doesn’t mean it’s on everyone else’s form. Very specifically, it’s not on my form. Your setup fee is your problem.

Yes, I get that! Except that I didn’t get a form custom-tailored to my situation. I’m pretty sure I got the same one you did. Each row shows totals for the entire fund and next to it a calculation per share. That being the case, if there is Y gross yield reported on the form and N total shares, and if M of us are not getting our 63 shares of it (let’s just say our setup fee is the whole gross yield), don’t the rest of you get Y/(N-63*M) per share? How would you know what M is? I strongly suspect they’re not providing enough info for us to do the 8621 right. I’m not even going to try to ask them this question.

@jb4422

“we made X, we’re going to keep Z% of it in our bank account and give (X-Z)% to you to put in your bank account”.

(X-Z)% wasn’t even on the form; it was only in the associated email! I think they’re showing X, and I probably have to pay ordinary income on Z, not having received X-Z, which I guess is my actual setup fee, unlike what BC told me.

I do understand about cost basis and the long term loan to the US. It is what it is. I’m just glad that QEF makes it somewhat fairer. Interesting that US PE works the same way.

In my 'net search for answers, I came across a QEF statement from a different PE fund. It had just four boxes: capital gains, ordinary income, and two kinds of distributions, I think. If only BC would make it that easy!

Well, I’ll see if they can explain why my dashboard shows a higher value than the form. Hoping to get something more enlightening than “umm…”

There is also a provision in the tax code for QEFs saying that the capital gains can’t exceed the “earnings and profits.” I suppose I’ll need to dig through their financial report for that, unless you’ve already done it?

[jb4422 (Jeff B)]

@D3uB

That being the case, if there is Y gross yield reported on the form and N total shares, and if M of us are not getting our 63 shares of it (let’s just say our setup fee is the whole gross yield), don’t the rest of you get Y/(N-63*M) per share? How would you know what M is? I strongly suspect they’re not providing enough info for us to do the 8621 right. I’m not even going to try to ask them this question.

I didn’t pay enough attention here to the question, I’m sorry. I can’t really speak to how the setup fee was paid for. I suspect it’s that you actually either got fewer shares in the first place, or you effectively paid more for the shares. It’s probably the equiv of mutual fund load. I don’t have any experience with this.

@D3uB

(X-Z)% wasn’t even on the form; it was only in the associated email! I think they’re showing X, and I probably have to pay ordinary income on Z, not having received X-Z, which I guess is my actual setup fee, unlike what BC told me.

That wouldn’t be on the form. Distributions to you are not taxable events in and of themselves - it is just changing that “so where is the cash”.

@D3uB

There is also a provision in the tax code for QEFs saying that the capital gains can’t exceed the “earnings and profits.” I suppose I’ll need to dig through their financial report for that, unless you’ve already done it?

There are some provisions there yes. I’ve written more extensively about this elsewhere. For the most part this won’t be applicable unless they lose a ton of money or something.

[D3uB (Dave L)]

@jb4422

I didn’t pay enough attention here to the question, I’m sorry. I can’t really speak to how the setup fee was paid for. I suspect it’s that you actually either got fewer shares in the first place, or you effectively paid more for the shares. It’s probably the equiv of mutual fund load. I don’t have any experience with this.

It’s ok, I’m just pointing out that if setup fees are taken out of the fund’s gross yield, the gross yield becomes distributed unevenly amongst the investors, and most will not have the info to know what their share is.

The BC setup fee is certainly a weird thing. I know I didn’t get fewer shares, or paid more for them, and there was no upfront fee like a mutual fund load. I sat in on the annual investor meeting. Several investors were confused why they weren’t getting a dividend this year. I’m pretty sure that’s all the setup fee is. It agrees with what Duarte told me up front. Maybe they should just stop calling it a subtraction from “gross yield.” I find that misleading, as I think of my gross yield as my part of the income of the fund, not the part of that income which was paid out to me in cash.

That being the case, my guess is that you earlier investors pay ordinary income on X, get paid a dividend of X-Z, and raise your basis by Z. We new investors pay ordinary income on Z, get no dividend, and raise our cost basis by Z. That’s what I’m going with. Don’t try to confuse me further with your limitless PE knowledge!

@jb4422

That wouldn’t be on the form. Distributions to you are not taxable events in and of themselves - it is just changing that “so where is the cash”.

It appeared on the much more straightforward QEF statement I found online for a different PFIC, which makes sense as the IRS seems to want to know about it on line 8 of the 8621. I think I understand what you’re saying, though: you owe tax on X regardless of how much dividend you get.

@jb4422

@D3uB

There is also a provision in the tax code for QEFs saying that the capital gains can’t exceed the “earnings and profits.” I suppose I’ll need to dig through their financial report for that, unless you’ve already done it?

There are some provisions there yes. I’ve written more extensively about this elsewhere.

Is that so? I’ll have to go digging for it. It may take me a while, as you’ve contributed so much to this forum! Thanks again for all your input! If I get anything new out of BC, I’ll post it here for the benefit of others.

[drlward (Larry Ward)]

This is ridiculous. We need to together force them to deliver a more transparent statement in the future.

[jb4422 (Jeff B)]

I think they would be open to it without “forcing”. Duarte was willing to set me up to discuss it with the tax lawyer who does the paperwork when I asked questions.

It’s not like BC themselves actually know anything one way or the other - they needed someone to put together a statement, they hired someone to do it, it was created, they’re passing it along in good faith that the report was created accurately.

I just haven’t had enough time/energy to actually have that conversation.

If someone else who understands all of the issues involved wants to talk to Duarte and have that conversation, have at it.

[mg2 (G)]

I agree that the BlueCrow team has been pretty good to work with. I am also pleased with their investments and tentative plans to take the fund public for liquidity, although there’s still plenty to be played out.

My area of concern on the PFIC statement was the other income which wasn’t attributed to the shares.

Ultimately, as long as my tax consultant / accountant is comfortable, I’m happy. To that end, has anyone worked with form8621.com this year? I used them last year and have not been able to get in touch with them this year. Any other consultants that anyone has used?

Thanks in advance. I’m glad the BlueCrow Investors have found each other.

[D3uB (Dave L)]

My area of concern on the PFIC statement was the other income which wasn’t attributed to the shares.

Did I miss something? @mg2 could you please explain what you mean by other income?
Thanks!

[mg2 (G)]

It’s the third line on the Income Section. It lines it our, but doesn’t allocate that “Other Income” to the participation Units.

If you do allocate that Other Income to the participation unites by dividing that figure by the number of units implied by the previous incomes, you end up with a different total income per allocation unit than Blue Crowe put on the PFIC statement.

This figure that I calculate allows Net Income per participation unit to reconcile with Blue Crowe’s bottom line figure.

In summary, I think they have a typo in the income section of the PFIC statement - I assume this is the same as the statement others are seeing. I’ll reach out next week.

[D3uB (Dave L)]

Oh that! Thanks for clarifying. Yes, you are right; they have a couple of typos on the statement. They should have listed a “per participation unit” (per share) value of 13.13, and the per share value for Total income as 678.20, not 769.84.

That income does belong to us as well. BlueCrow told me so via email when I asked, and it can also be found on the balance sheet (see 2022 annual report, page 12) as “Other earnings.”

Basically they told me that “Fair Value Increases” is our unrealized capital gains and “Interest obtained” plus “Other income” minus “Total expenditure” is our ordinary income.

That’s if you’re NOT paying a setup fee for 2022 (because you subscribed in 2021 or earlier). The PFIC/QEF statement doesn’t help at all for that. In my interpretation, you would take the total payout of the dividend (which you’re getting no part of – that’s your “setup fee”) they announced in the recent shareholder meeting and subtract it off of net income. Since the dividend is bigger than all of 2022 net income, the rest comes off of retained earnings; that is, the value of your shares goes down, which I took as a hit to capital gains.

Also, I wasn’t quite sure how to handle my instant profit of the difference in share value between my subscription price of 8,016.64 (8,000 plus bank transaction fee) and the “current value” of the shares at that time of 8,130.91. My bank (Bison) reported that current value on their annual statement. The number agrees with the fund equity at the end of 2021 as seen on their annual report for that year. Every time I get “free money” (ESPP and RSU current market value, for example), the IRS wants me to pay tax on it as ordinary income, so I took it as ordinary income to be conservative and upped my cost basis accordingly.

[jb4422 (Jeff B)]

@D3uB

Also, I wasn’t quite sure how to handle my instant profit of the difference in share value between my subscription price of 8,016.64 (8,000 plus bank transaction fee) and the “current value” of the shares at that time of 8,130.91. My bank (Bison) reported that current value on their annual statement.

You ignore it unless you didn’t elect QEF.

You are taxed on income.

QEF is basically a way to say that what happens to the fund is what is happening to you (passthrough).

There are four ways the fund - and thus you - is going to have gains.

• interest, dividends - ordinary income
• operational income (e.g. the business they own makes money) - ordinary income
• they sell something for more than they paid for it - capital gain
• something they own is evaluated by the auditors or other valuation source as worth more than they paid.

That last item raises the book value of the fund, and thus the per share price. It isn’t however income. Income is what is taxed. You don’t pay taxes on the NAV of your mutual fund going up, similarly you wouldn’t pay taxes on the shares of your fund being worth more.

It would probably be helpful to think of the share price as reported by Bison as “NAV” in the same way that a mutual fund has NAV. Ok sure a US mutual fund can trade for more or less than NAV on a public marketplace and so the price on your broker statement will show that, though it doesn’t negate the existence of NAV. There is no public marketplace for these funds, all Bison has is NAV, so they are going to print and use that. However, it’s really just a mark. It’s not ever used for tax purposes.

If you elected MTM, then all you have is the NAV mark, and you use that. This is the same logic used elsewhere in the IRS code, of using whatever reliable mark is available for a mark-to-market asset.

[jb4422 (Jeff B)]

@mg2

I am also pleased with their investments and tentative plans to take the fund public for liquidity, although there’s still plenty to be played out.

I missed the meeting - I always get the time offset wrong. Taking the fund public for liquidity? Why?

[mg2 (G)]

My recollection is that BlueCrow recognizes that investors will have different timing in their need for liquidity.

Personally, I can see investors wanting to sell today and switch to D7, and then there are both the 5ish and 10ish year options to apply for citizenship. I believe the mechanism for early liquidity today would probably be BlueCrow matching you with an interested buyer at a discount, which is a hassle and creates agency problems for the firm. If they float the fund and the market sets the price, they could do away with the agency issues for minimal administrative cost while providing constant liquidity.

I like the idea, myself. Moreso, I like that these guys are pursuing solutions for their investors.

[jb4422 (Jeff B)]

It’s not even necessarily that complicated. Remember that there is going to be some amount of income from these properties and therefore some amount of cash being generated, as well as whatever churn of the portfolio itself. Thus there is some amount of liquidity available in any event. If there’s enough cash slushing around anyway, for a onesie-twosie redemption here and there, they will probably just let people redeem. Or they’ll time it and say “well this property’s due to be sold 3 quarters from now, we’ll let you out then.”

This is how a typical PE fund operates. You can’t just withdraw funds at will. You register an intent to withdraw. The fund then has some 90-120-360 days to actually cough up the cash, and the withdrawal is subject to available liquidity.

I think more than anything, the thing is that BCG1 isn’t really a “GV” fund in the first place, it’s just one of their pre-existing vehicles that they decided to market to GV. So it looks and acts like a normal PE fund, because it is. It has to, because it has a bunch of non-GV investors in it who would be pissed if it DID act like a GV fund. Most of the rest were cooked up as GV funds to take advantage of the GV investors’ unique profile, and it shows. (Which is one reason why I avoided them.)

[mg2 (G)]

I’m more familiar with Institutional Private Equity funds, which is where moreso where this group comes from. They do not offer interim liquidity; rather, they wait until investments are realized and return cash proceeds to investors.

Unrealized PE marks aren’t taken very seriously by institutional investors and they would tend to be overvalued when investors would seek liquidity. To get liquid, you’d typically need to trade your interest on a secondary market to another investor at a discount to unrealized NAV.

I actually know some people the BlueCrow team previously worked with…I think I’m on the mark with how they look at this.

[jb4422 (Jeff B)]

@mg2

I’m more familiar with Institutional Private Equity funds, which is where moreso where this group comes from. They do not offer interim liquidity; rather, they wait until investments are realized and return cash proceeds to investors.

Acknowledged. It depends. I deal in financial PE (hedge funds, if you will) so that’s my experience base. When your underlying assets are fairly liquid then your liquidity terms can be more flexible. I was looking at some commercial real estate stuff in the US, and that of course was fixed-term, but they were also working to a very specific set of assets so there was no flexibility to be had.

I think BC has a little more flexibility than that. Not tons, but a little. It’s a conversation I recall having with Duarte at one point. I think it’s more along the lines of “my dad died, I have to stay in the US forever now” then they can scrounge up some cash, versus “I want to switch to D7” well uh sorry no.

As to the longer term, the expressed intent was that they were going to plan asset sales based on where people were and generate appropriate liquidity to let people out roughly on schedule, e.g. some will be due in 2026, some in 2027, some got stuck in SEF hell-queue and will be 2029…

@mg2

Unrealized PE marks aren’t taken very seriously by institutional investors and they would tend to be overvalued when investors would seek liquidity.

Agreed. For valuation purposes on the banks’ books, you gotta mark to something, and that’s all you have. That’s all I meant to say. No way you’d sell out early at NAV.

[D3uB (Dave L)]

@jb4422

@D3uB

Also, I wasn’t quite sure how to handle my instant profit of the difference in share value between my subscription price of 8,016.64 (8,000 plus bank transaction fee) and the “current value” of the shares at that time of 8,130.91. My bank (Bison) reported that current value on their annual statement.

You ignore it unless you didn’t elect QEF.

You are taxed on income.

QEF is basically a way to say that what happens to the fund is what is happening to you (passthrough).

There are four ways the fund - and thus you - is going to have gains.

• interest, dividends - ordinary income
• operational income (e.g. the business they own makes money) - ordinary income
• they sell something for more than they paid for it - capital gain
• something they own is evaluated by the auditors or other valuation source as worth more than they paid.

That last item raises the book value of the fund, and thus the per share price. It isn’t however income. Income is what is taxed. You don’t pay taxes on the NAV of your mutual fund going up, similarly you wouldn’t pay taxes on the shares of your fund being worth more.

It would probably be helpful to think of the share price as reported by Bison as “NAV” in the same way that a mutual fund has NAV. Ok sure a US mutual fund can trade for more or less than NAV on a public marketplace and so the price on your broker statement will show that, though it doesn’t negate the existence of NAV. There is no public marketplace for these funds, all Bison has is NAV, so they are going to print and use that. However, it’s really just a mark. It’s not ever used for tax purposes.

If you elected MTM, then all you have is the NAV mark, and you use that. This is the same logic used elsewhere in the IRS code, of using whatever reliable mark is available for a mark-to-market asset.

Sorry for the long quote; I felt all of it was necessary to preserve context.

I wasn’t sure whether “net capital gains” referred to in tax code section 1293(a)(1)(B), the section on QEF taxation, included unrealized capital gains. However, after further research, I’m inclined to agree with Jeff’s assessment of how capital gains are treated, even with a PFIC, as opposed to an American fund.
The following article on a slightly related matter gives some analysis of the treatment of net capital gains in a QEF: https://www.andrewmitchel.com/blog/2018_03_qualified-electing-funds-qefs-receiving-qualified-dividend-income

There appears to be no distinction for QEFs/PFICs separate from those of any other kind of investment. The definition of captial gains itself is in section 1222, which is completely separate from any PFIC tax code.

There are still a couple of things that don’t sit well with me, though. The first is that the PFIC statement from BlueCrow lists “Fair Value Increases.” As it doesn’t appear that BC has sold any assets, this value should be irrelevant for reporting actual (realized) capital gains, but they also don’t say anywhere what the actual capital gains are, as required by their QEF reporting obligations (section 1295-1(g)(1)(ii)). It looks like BC or their accountants intended for us to report Fair Value Increases as our net capital gains, even though it looks like that would be incorrect.

The second thing that bothers me, though maybe I’m just being paranoid, is that PFIC tax treatment generally seems to intend that PFIC holders pay taxes every year regardless of whether gains are realized. That much is clear from the section 1291 and MTM options. QEF allowing us to get away without paying annual taxes on our virtual capital gains just seemed too good to be true!

I may just continue to pay the virtual capital gains simply because BC seems to be reporting it that way, at the expense of giving the US government a free long-term loan.

[jb4422 (Jeff B)]

@D3uB

There are still a couple of things that don’t sit well with me, though. The first is that the PFIC statement from BlueCrow lists “Fair Value Increases.” As it doesn’t appear that BC has sold any assets, this value should be irrelevant for reporting actual (realized) capital gains, but they also don’t say anywhere what the actual capital gains are, as required by their QEF reporting obligations (section 1295-1(g)(1)(ii)). It looks like BC or their accountants intended for us to report Fair Value Increases as our net capital gains, even though it looks like that would be incorrect.

As has been mentioned, the way the PFIC statement is done isn’t the best. One could argue they are simply being complete as well.

@D3uB

The second thing that bothers me, though maybe I’m just being paranoid, is that PFIC tax treatment generally seems to intend that PFIC holders pay taxes every year regardless of whether gains are realized. That much is clear from the section 1291 and MTM options. QEF allowing us to get away without paying annual taxes on our virtual capital gains just seemed too good to be true!

No. You only ever pay on realized gains, unless you are in a mark-to-market type of situation. Even the base PFIC treatment (no QEF or MTM) is fundamentally a mark-to-market just under punitive rules. It is always one or the other. QEF is pretty explicitly not mark-to-market.

[garrett]

@jb4422

No. You only ever pay on realized gains, unless you are in a mark-to-market type of situation

How does that track with us over in the IMGA thread that have taken QEF having to add to our cap gains and income for the year, and then presumably pay taxes on it?