Paul L. Caron

Friday, August 3, 2007

A Practitioner's Take on the Private Equity Tax Debate

Joe Kristan (Roth & Co.) offers his thoughts on the private equity tax debate in Tax "Carried Interests" as Ordinary Income - Because Partnership Tax Law Isn't Hard Enough?:

These are the kinds of proposals that would only be made by somebody who isn't actually trying to run a business or prepare real tax returns. Subchapter K, the partnership rules, are notoriously complex. Only an academic would seek ways to make them worse.

Ultimately, it's not clear that there is a problem here that needs solving. So what if the management ultimately gets capital gains? As long as the tax law provides capital gain rates in the first place, why should the managers be left out? The carried interest is a gamble; they could (and often do) end up with no gain at all. The annual fee is already ordinary income; it seems like rough justice that the "safe" part of the management compensation is ordinary, while the risky part is capital gain.

As far as the tax law is concerned, the managers are partners. Trying to make the tax results from one set of partners differ from another requires a lot of arbitrary distinctions and a lot of complexity. It's not worth it to muck up an already baroque part of the tax law just because politicians and academics find hedge fund managers distasteful.

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