TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Thursday, October 24, 2013

NY Times: Sun Capital Gives Administration Opportunity to Bypass Congress and Eliminate Private Equity Tax Break

NY Times Dealbook (2013)New York Times DealBook:  A Chance to End a Billion-Dollar Tax Break for Private Equity, by Steven M. Davidoff (Ohio State):

A recent court case has given the federal government a chance to sidestep Congress and eliminate private equity’s billion-dollar tax break. The question is whether the Obama administration takes up the fight.

At issue is “carried interest” — a term of art that refers to the profits that a private equity adviser makes from investing in companies. Because of what critics term a loophole and private equity firms call common sense, such income is taxed at the capital gains rate of 20 percent instead of as income, which would put it at a maximum of 39.6 percent. That tax treatment has meant that the heads of private equity firms like the Blackstone Group’s Stephen A. Schwarzman pay billions of dollars less in taxes. ...

In defense, private equity advocates like the Private Equity Growth Capital Council argue that the profits are investment income and to change the tax code would mean that private equity firms would have less of an incentive to invest, upending a policy that “has helped America prosper for more than 100 years.”

Unswayed, the Obama administration has tried repeatedly to tax private equity profits as income, a move that would raise an estimated $16 billion extra over a decade. The rabid anti-tax fervor in Congress, however, has prevented any change.

Now, a court case involving the private equity firm Sun Capital Partners has upended the entire treatment of carried interest. ...

Sun Capital has hit like a bomb in the private equity industry, notes Victor Fleischer, professor of law at the University of San Diego and a DealBook contributor. Showing how serious tax experts take this, Tax Notes, the leading tax publication, ran a series of articles on the case and private equity in a recent issue.

The Treasury Department and the IRS have a good argument that private equity firms should no longer be permitted to get carried interest treatment. ... [I]t may now be that this battle to tax carried interest is not won or lost in the halls of Congress over high-minded concepts of fairness or equity, but rather in the halls of the IRS by applying common sense presumptions that existed all along.

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