Key Takeaways
- • Tax blockers enable alternative asset managers to broaden investor access by allowing private equity, real estate, and private credit strategies to qualify as Registered Investment Companies (RICs) and be distributed through registered tender-offer and interval funds to retail and institutional investors.
- • The 90% "Good Income" test is the critical regulatory hurdle that RICs must satisfy; tax blockers isolate "bad income" from alternative investments, allowing fund managers to comply with Internal Revenue Code requirements without restructuring their underlying investment strategy.
- • Tax blockers are tax-paying corporate entities that transform income classified as "bad" (non-qualifying under RIC rules) into structures that enable the parent fund to meet qualification thresholds while distributing income taxed at the investor level rather than at the corporate level.
- • Interval funds offer superior liquidity and market accessibility compared to private funds, with daily NAV strikes and purchase availability, positioning tax blockers as a practical solution for managers seeking to democratize access to alternative assets while maintaining tax efficiency.
- • The tax blocker strategy has gained momentum as asset managers increasingly recognize the competitive advantage of packaging alternative strategies in registered vehicles that appeal to a broader investor base while preserving the tax benefits of RIC status.
Summary
Tax blockers have emerged as a critical structural tool for investment managers seeking to offer alternative asset strategies—including private equity, real estate, and private credit—through registered tender-offer and interval funds accessible to a substantially broader investor base than traditional private fund structures allow.
According to Spencer Erickson, Tax Managing Director at UMB Fund Services, the primary regulatory constraint driving tax blocker adoption is the Internal Revenue Code's 90% "Good Income" test, which RICs must satisfy to qualify for preferential tax treatment. Alternative investment strategies frequently generate "bad income"—income that does not qualify under RIC rules—in excess of the 10% tolerance threshold. Tax blockers solve this compliance problem by isolating non-qualifying income streams in separate tax-paying corporate entities, effectively blocking that income from the parent fund's gross income calculation. This structural segregation allows the fund to pass the good income test, achieve RIC qualification, and distribute earnings to investors who pay tax at the individual level rather than the corporate level.
The mechanics of the tax blocker strategy are straightforward: bad income-producing assets are placed in the blocker structure, which bears corporate-level taxation on that income, while the parent fund retains qualifying income sufficient to meet the 90% threshold. This approach preserves the underlying investment strategy without requiring managers to fundamentally alter their asset selection or portfolio construction.
Registered interval and tender-offer funds offer distinct advantages over traditional private funds, including daily NAV strikes and daily purchase availability, which enhance investor access and liquidity. These structural features, combined with tax blocker deployment, position managers to attract institutional investors, family offices, and retail participants who would otherwise lack practical access to alternative asset classes. The growing adoption of tax blockers reflects both the maturation of the interval and tender-offer fund marketplace and managers' recognition that regulatory compliance and tax efficiency can coexist with democratized access to alternative investments.
According to Spencer Erickson, Tax Managing Director at UMB Fund Services, the primary regulatory constraint driving tax blocker adoption is the Internal Revenue Code's 90% "Good Income" test, which RICs must satisfy to qualify for preferential tax treatment. Alternative investment strategies frequently generate "bad income"—income that does not qualify under RIC rules—in excess of the 10% tolerance threshold. Tax blockers solve this compliance problem by isolating non-qualifying income streams in separate tax-paying corporate entities, effectively blocking that income from the parent fund's gross income calculation. This structural segregation allows the fund to pass the good income test, achieve RIC qualification, and distribute earnings to investors who pay tax at the individual level rather than the corporate level.
The mechanics of the tax blocker strategy are straightforward: bad income-producing assets are placed in the blocker structure, which bears corporate-level taxation on that income, while the parent fund retains qualifying income sufficient to meet the 90% threshold. This approach preserves the underlying investment strategy without requiring managers to fundamentally alter their asset selection or portfolio construction.
Registered interval and tender-offer funds offer distinct advantages over traditional private funds, including daily NAV strikes and daily purchase availability, which enhance investor access and liquidity. These structural features, combined with tax blocker deployment, position managers to attract institutional investors, family offices, and retail participants who would otherwise lack practical access to alternative asset classes. The growing adoption of tax blockers reflects both the maturation of the interval and tender-offer fund marketplace and managers' recognition that regulatory compliance and tax efficiency can coexist with democratized access to alternative investments.
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