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Friday, June 29, 2007

Sanchirico on The Tax Advantage to Paying Private Equity Fund Managers with Profit Shares

Chris William Sanchirico (Penn) has posted The Tax Advantage to Paying Private Equity Fund Managers with Profit Shares: What Is It? Why Is It Bad? on SSRN.  Here is the abstract:

Private equity funds purchase ailing companies, restructure them over the course of several years, and then sell them at a profit. Fund managers typically receive a share of fund profits in return for their services. The tax treatment of this form of service compensation has recently come under close scrutiny in the press, the academy, and Congress. This paper helps to clarify the nature of the tax advantage accorded to such compensatory profit shares. The paper also critically assesses some of the chief arguments for and against the current tax treatment of such compensation schemes.

http://taxprof.typepad.com/taxprof_blog/2007/06/sanchirico-on-t.html

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Comments

It pleases me to see that this careful, expert paper agrees precisely with my analysis of the problem, which I repeated in a comment to this weblog's notice of David Weisbach's clever piece advocating special tax subsidy for investment partnerships:

http://taxprof.typepad.com/taxprof_blog/2007/07/weisbach-do-not.html#comments

Sanchirico writes: “The analysis in this paper suggests that the real issue runs deeper than this rather myopic application of “horizontal equity” principles. When the scope of analysis is suitably widened, it becomes apparent that the real problem may the preferential rate for capital gains itself, and not the way in which fund managers are accessing it.

Posted by: Mark Seecof | Aug 10, 2007 3:46:53 PM