Private funds are carefully structured to optimize the tax treatment of gains for LPs and GPs. Traditionally, recourse liabilities have been allocated to GPs to offset the tax gains from their incentive allocations. That model has been disturbed, however, by recent regulatory changes to the allocation of partnership liabilities. The new stricter standards for what constitutes a recourse liability threatens to significantly increase the tax bill for GP entities, which has sent fund managers scrambling to find a viable solution. The recent Private Investment Fund Tax and Accounting Forum hosted by Foundation Research Associates outlined those changes and how fund managers can respond in a panel featuring James C. Cofer, partner at Seward & Kissel, and Ahuva Indig, partner at RSM U.S. This first article in a two-part series explores what specific regulatory changes were enacted as to partnership liability allocations and why it is problematic for fund managers. The second article will prescribe several paths managers can pursue to mitigate the tax ramifications therefrom, while also briefly exploring other tax reporting issues recently introduced by the IRS. For additional commentary from Cofer and other Seward & Kissel attorneys, see our two-part series: “Trends in Private Fund Seeding Arrangements and Fee Structures” (Jul. 23, 2015); and “Key Trends in Fund Structures” (Jul. 30, 2015).