It didn't take long for the other shoe to drop as the hubub around the initial public offering of Blackstone Group LP, whose shares began trading Friday morning, clued Congress into how much money buyout firms are making, while paying only the 15% capital gains tax by virtue of a partnership structure.
So with little surprise, a group of House Democrats introduced legislation Friday that would change the tax treatment of carried interest — from capital gains to ordinary income. The bill would affect not only newly public firms like Blackstone, but all "investment management firms" including private equity, venture capital, real estate and hedge funds, whether they are public or not.
Currently, the general partners of private investment partnerships pay the 15% capital gains tax rate on carried interest, rather than the ordinary income tax rate of 35%. The fact sheet released with the bill says: "This will apply to any investment management firm without regard to the type of assets, whether they are financial assets or real estate. The test is the form of compensation, not the type of assets the firm is managing, its investment strategy or the amount of compensation involved." Rep. Sander Levin sponsored the bill, along with Chairmen Charles Rangel and Barney Frank, as well as Ways and Means Committee members, including Reps. Pete Stark, Jim McDermott, John Lewis, Richard Neal, Earl Pomeroy, Stephanie Tubbs Jones, John Larson, Earl Blumenauer, Ron Kind, and Bill Pascrell.
No word yet on when the bill's increased tax rate would kick in. The Ways and Means Committee is scheduled to hold a hearing on the issue in July, a meeting the the National Venture Capital Association is sure to attend; while the newly minted association advocating for LBO firms, the Private Equity Council, will find itself having to get up to speed even faster than it thought. —George White
See story about IPO from TheDeal.com
See story about backlash from The Deal newsweekly
See Congressional press release
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