Legislation to boost the tax rate on carried interest is going back before Congress. In addition to the plans laid out in President Barack Obama’s budget for fiscal 2010, Rep. Sander Levin, a Democrat from Michigan, has reintroduced his own proposal, which first made an appearance in the House of Representatives in 2007 but never made it into law.
The bill this time around is very similar to its previous incarnation, moving to treat carried interest as ordinary income, rather than capital gains, a designation that would lift the tax rate to 35 percent or more. Levin sees the issue in stark terms, boiling it all down to “a basic issue of fairness,” according to a statement announcing the bill’s reintroduction, and he was clear about his expectations for the bill’s impact on the appetite for investing with buyout shops, venture capital firms, hedge funds and other affected entities.
“Anyone who actually invests money in these funds will continue to receive capital gains treatment, including the managers,” he said, concluding: “There is no reason to expect the amount of capital available for these kinds of investments will be reduced.”
Of course, that’s a matter that’s still up for debate. Of more pressing concern are some of the differences in the latest bill, which New York-based law firm Paul, Weiss, Rifkind, Wharton & Garrison LLP said “goes further than the prior proposals in some important respects” in a memo to clients.
For example, the current draft proposal lays the groundwork for publicly-traded partnerships, such as
Richard Bronstein, a partner with Paul, Weiss, told Buyouts the current bill not only plugs these kind of gaps, it also provides the Treasury Department with a “very broad grant” to react to changes in structure that buyout shops might make to combat the impact of the legislation.
The provision in question allows the Treasury Secretary to modify regulations in order to “prevent avoidance” of the purposes of the bill. So be warned, buyout pros, if this bill finds its way into law, a clever new legal structure isn’t likely to hold the tax man at bay.