Paul L. Caron

Sunday, May 15, 2016

Larry Summers, Robert Rubin And The President's Authority To Tax Carried Interest As Ordinary Income

Following up on yesterday's post, The President's Authority To Unilaterally Raise Taxes

Business Insider, Larry Summers Just Threw Epic Shade About Tax Breaks Right in a Private-Equity CEO's Face:

On Wednesday morning, at the SkyBridge Alternatives hedge fund conference, Carlyle Group co-CEO David Rubenstein interviewed [former Treasury Secretary Larry] Summers alongside his Clinton administration colleague, Robert Rubin.

But at one point, Summers turned the tables on Rubenstein, with an assist from Rubin.

The interviewees noted that Rubenstein could teach the audience some lessons on influencing government, given his surprisingly successful record of fighting to retain the "carried interest" tax loophole, which gives private-equity and hedge fund managers a tax preference on their performance fees.

"Rarely has a policy existed so long with such weak arguments in its favor," said Summers, in backhanded praise of Rubenstein's lobbying skill. "It's the First Amendment, the Second Amendment, and carried interest, right?"

"Not necessarily in that order," Rubin added.

Rubenstein replied that, if Summers and Rubin thought the tax preference for carried interest was such bad policy, then they could have used executive action to eliminate it when they served in the Treasury Department.

"Not sure it works like that," Rubin replied.

He's right: You would need legislation to close the loophole, and that legislation has been stalled by private-equity-friendly members of Congress.

David Hemel (Chicago), Two-and-Twenty and Fifty-Fifty:

Frankly, I don’t understand how anyone can say with confidence that Treasury can or can’t change the tax treatment of carried interest without a further act of Congress. If Treasury does act alone on carried interest, the likeliest route for it to take would be to promulgate regulations under section 707(a)(2)(A). ...

[I]f Treasury takes the position that section 707(a)(2)(A) authorizes it to characterize private equity and venture capital carried interest profits as ordinary income, and if it promulgates regulations to that effect, how strong would its position be? If we think along the continuum of tax opinion standards  — “would,” “probable,” “more likely than not,” “substantial authority,” “realistic probability of success,” “reasonable basis,” and “not frivolous” — it seems to me that Treasury would be at least in “substantial authority” territory. I’d call it a 50–50 shot of surviving judicial review. And while I’m not a partnership tax expert, neither are the court of appeals judges (or Supreme Court justices) who would be the likely deciders. In predicting the way that non-specialist judges would rule on the question, subject-area expertise is both an advantage and a disadvantage.

Importantly, this analysis is predictive rather than normative. Treasury officials might take the view that even if a reviewing court might not give the legislative history of the 1984 law much weight, they themselves think that legislative history should be controlling and should act (or, more precisely, not act) accordingly. But as a purely predictive matter, I don’t think anyone can say that Treasury regulations on carried interest definitely would or definitely wouldn’t survive judicial review. Rubin’s reply to Rubenstein strikes me as almost on the money: “Not sure it works like that,” but also not sure it doesn’t.

Tax | Permalink


Tax policy equivalent of looking for spare change in the sofa. Now matter what the smart guys do, it will not raise much money. Plus, one can only imagine the unintended consequences.

Posted by: Dale Spradling | May 15, 2016 9:12:13 AM