Paul L. Caron

Thursday, April 30, 2015

George Soros May Face a Monster $6.7 Billion U.S. Tax Bill

Soros 2Bloomberg, George Soros May Face a Monster Tax Bill:

George Soros likes to say the rich should pay more taxes. A substantial part of his wealth, though, comes from delaying them. While building a record as one of the world’s greatest investors, the 84-year-old billionaire used a loophole that allowed him to defer taxes on fees paid by clients and reinvest them in his fund, where they continued to grow tax-free. At the end of 2013, Soros—through Soros Fund Management—had amassed $13.3 billion through the use of deferrals, according to Irish regulatory filings by Soros.

Congress closed the loophole in 2008 and ordered hedge fund managers who used it to pay the accumulated taxes by 2017. A New York-based money manager such as Soros would be subject to a federal rate of 39.6 percent, combined state and city levies totaling 12 percent, and an additional 3.8 percent tax on investment income to pay for Obamacare, according to Andrew Needham, a tax partner at Cravath, Swaine & Moore. Applying those rates to Soros’s deferred income would create a tax bill of $6.7 billion. That calculation is based on publicly available information such as the Irish regulatory filings, which provide only a partial glimpse into Soros’s finances. ....

Just before Congress closed the loophole, Soros transferred assets to Ireland—a country seen by some at the time as a possible refuge from the law. The filings show for the first time the extent to which Soros’s almost $30 billion fortune—he ranks 23rd on the Bloomberg Billionaires Index—came from finding ways to delay taxes and reinvesting the money in his fund. ....

Soros started what would become the Quantum Endowment Fund in 1973 with about $12 million from investors, primarily wealthy Europeans, basing it in the then-Netherlands Antilles, according to a book he published in 1995 called Soros on Soros. He immediately began reinvesting almost all of his share of client profits, he wrote. When Soros founded his firm, nothing in U.S. law prevented money managers from postponing the acceptance of client fees and letting the money remain in their funds, where it could grow untaxed. But doing so wasn’t really an option for funds based in the U.S., because if managers didn’t take the fees, their clients wouldn’t be able to deduct them from their own taxable income.

Hedge fund managers could circumvent this obstacle by setting up parallel offshore funds for investors who weren’t subject to U.S. taxes and who therefore didn’t care whether their fund manager deferred taxes on the fees. That way, the fees—typically 2 percent of the amount invested and 20 percent of any profits—plus any investment gains, could grow without being taxed until the managers withdrew the money.

Deferring taxes is particularly valuable to hedge fund managers because most of their profits typically come from short-term trading and are subject to ordinary income taxes instead of the lower capital-gains rate.... Ordinary income taxes represent “quite a hit” to hedge fund manager profits, says Victor Fleischer, a law professor at the University of San Diego. “There is a lot at stake if they can defer that and reinvest it on a pretax basis.”

As the hedge fund industry grew, a “substantial majority” of managers obtained similar deferrals by raising money offshore. ... On Oct. 3, 2008, President George W. Bush signed legislation closing the offshore loophole.

The law included an exemption for companies based outside the U.S. that were subject to local taxes. A week before the law was signed, Soros incorporated a new company in Ireland. Quantum Endowment transferred the deferred fees along with certain other assets and liabilities to the new company, called Quantum Endowment Ireland. ...

Soros set up Quantum Endowment Ireland as an Irish Section 110 company that is subject to a 25 percent corporate tax, at least in theory. Because Section 110 companies can issue so-called profit participation notes and pay out almost all their earnings as distributions to holders of the notes, they usually wind up paying very little tax. ...

From October 2008 through the end of 2013, Quantum Ireland paid Irish taxes of $962 on $3,851 of net income after allocating $7.2 billion of operating income to investors as distributions on profit participation notes, according to its financial statements. ...

At least four tax attorneys say they know of no way for money managers to avoid the bill that comes due in 2017.

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Soros will never pay this. The taxes he favors are to spend other people's money, not his own. He and other rich progressives believe that they can spend their money more effectively than governments, but that nobody else can.

Posted by: AMTbuff | Apr 30, 2015 11:09:22 AM

@AMTbuff -- you nailed it. Like Sen Long said: don't tax me; don't tax thee; let's tax the feller behind the tree

Posted by: Dale Spradling | May 1, 2015 8:43:39 AM

Soros is no progressive. The best term to describe him would be parasite.

Posted by: paul | May 2, 2015 9:42:11 AM