Deal contributors Peter G. Smith, Philip R. Weingold and Blake A. Rigel,
corporate and tax attorneys with Kramer Levin Naftalis & Frankel LLP, take a
look at what's on Congress' plate for 2008 in the Jan. 14 issue of The Deal
newsweekly, as they tackle a topic that has generated heated reaction from the
deal community of late: taxing private investment funds.
Continue reading below
On the table:
Carried Interest -- The debate centers around whether investment
managers' compensation should be taxed as capital gains at 15%, or ordinary
income, up to 35%. Smith, Weingold and Rigel:
On Oct. 25, 2007, Rep. Charles Rangel, D-N.Y., introduced House bill H.R.
3970, which included a provision on income from an "investment services
partnership interest" (a partnership interest held by a partner who provides
investment services to the partnership) as compensation. Thus, income from
carried interest would be taxed at ordinary income rates and be subject to
self-employment taxes. The bill also provides that gain on the sale of an
investment services partnership interest would be treated as compensation.
However, any portion of a manager's carried interest attributable to capital
invested by the manager would not be treated as compensation.
Deferred compensation -- At issue is whether the ability to defer
compensation from offshore funds is enabling managers to defer taxes on millions
of dollars in income.
In early 2007, House bill H.R. 2 proposed an annual limit on deferred
compensation equal to the lesser of $1 million or the manager's average
compensation during the five prior years. This legislation was not enacted, but
tax lobbyists expect it to resurface in legislation as a revenue
raiser.
Debt-financed income -- Tax-exempt investors generally
invest in funds through offshore corporate "feeders" to avoid having
debt-financed income imputed to them from the funds' leveraged investments.
Congress' concern centers on the amount of TEI capital heading offshore.
The Rangel bill would provide that debt a fund incurred to buy securities and
commodities would not be imputed to TEI limited partners. If enacted, the need
for TEIs to structure fund investments through offshore vehicles would likely be
reduced.
Publicly traded partnerships -- PTPs are largely treated as
corporations for tax reasons, but if 90% or more of a PTP's gross income is
"qualifying income," it is taxed as a partnership, and investors are subject to
one level of tax.
Recent initial public offerings in which managers tapped public markets while
still being eligible for a single level of taxation and favorable capital gains
rates caught Congress' eye. In response, Senate bill S. 1624 and House bill H.R.
2785 were proposed. This legislation would provide that the qualifying income
exception would not apply to a PTP that derives income from investment advisory
or asset management services. These proposals would result in managers that go
public generally being taxed as corporations.
- Carolyn Murphy
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full article on TheDeal.com
