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The Water Cooler
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'We Don't Believe Anybody Is Entitled to Success in This Country'
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<blockquote data-quote="Hobbes" data-source="post: 1933201" data-attributes="member: 3371"><p>Here is a better explanation than I can explain it:</p><p></p><p>Okay, now for those who, inexplicably, would rather spend their free time reading Fifty Shades of Grey than Tax Notes columnist Lee A. Sheppard, some background is needed. Carried interest is the 20% or so of profits that managers of private equity and hedge funds demand from their investors. In effect, its pay for their services, contingent on their resultskind of like a CEOs bonus tied to a companys results. But instead of being taxed like a bonus, at top ordinary income tax rates of 35%, plus Medicare payroll taxes, carried interest gets taxedthough the indulgence of the IRS as Sheppard puts itas long term capital gains, at a current top rate of just 15%. (To oversimplify: the carried interest share, when awarded, supposedly cant be valued, and so the IRS lets the money managers elect to value it at zero and then have their future income taxed as if they were partners who had risked their own capital in the fund.)</p><p></p><p>After Romney left Bain in 1999 to run the Salt Lake City Olympics, he negotiated a deal that gave him carried interest in Bain funds set up for a decade after his departureand hence a stream of retirement income taxed at low rates. By contrast, executives of big public companies get taxed on their cushy deferred compensation at the 35% rate.</p><p></p><p>Today, the Wall Street Journal expands on Graetzs observation, posting materials here from a 2008 legal continuing education presentation by that partner from Romneys trustees law firm, Ropes & Gray. In his presentation, the partner noted that based on the income tax valuation of zero the IRS had allowed for carried interest, in the 1990s and early 2000s, some lawyers were advising clients they could give carried interest away and claim it had zero value for gift tax purposes too. (Since then, practitioners have decided, based on various cases and proposed rules, that they must give gifts of carried interests a value greater than zero.) The Romney campaign wouldnt tell the Journal if Romney gifted any of his carried-interest rights to the family trust, although there are indications that might well be the case.</p><p></p><p>Oh, yeah. And then there are the 950 pages of Bain-related documents Gawker posted on the web on Thursday. No, there were no great revelations in those documents. But as The New York Times reports here, they seem to indicate that Bain partners converted $1 billion of straight management fees (which are not contingent on profit, and are taxable at 35%) into additional lower taxed carried interest. Victor Fleischer, a University of Colorado law prof who has written extensively (and critically) on the carried interest break, argues here that such conversion isnt legalalthough theres no evidence the IRS has challenged it.</p><p></p><p>You get the idea: Its the carried interest, stupid. Carried interest is one sweet tax breaka loophole created (like many others benefiting the richest) not by a conscious decision of Congress, but by a combination of smart and aggressive private lawyers and outgunned and gun-shy IRS officials. It is, in other words, a good example of what some folks think is wrong with the way our tax code currently operates. For tax reformers, Mitt Romneys income and gift tax returns could provide a unique teachable moment.</p><p></p><p>Of course, theres nothing stopping the politicians (even without seeing Romneys returns) from closing the carried interest loophole nothing, that is, other than fear of angering billionaire donors. Most famously, billionaire Stephen Schwarzman, co-founder and CEO of The Blackstone Group, compared President Obamas and fellow Democrats attempts to tax carried interest at 35% to Hitlers invasion of Poland. (He later apologized for that comment.)</p><p></p><p>So whats Romneys position on the taxation of carried interest? As Fortune notes here, during the last presidential campaign, Romney opposed ending the carried interest break. This time around, he has yet to say.</p><p></p><p><a href="http://www.forbes.com/sites/janetnovack/2012/08/24/romneys-taxes-its-the-carried-interest-stupid/" target="_blank">http://www.forbes.com/sites/janetnovack/2012/08/24/romneys-taxes-its-the-carried-interest-stupid/</a></p></blockquote><p></p>
[QUOTE="Hobbes, post: 1933201, member: 3371"] Here is a better explanation than I can explain it: Okay, now for those who, inexplicably, would rather spend their free time reading Fifty Shades of Grey than Tax Notes columnist Lee A. Sheppard, some background is needed. Carried interest is the 20% or so of profits that managers of private equity and hedge funds demand from their investors. In effect, its pay for their services, contingent on their resultskind of like a CEOs bonus tied to a companys results. But instead of being taxed like a bonus, at top ordinary income tax rates of 35%, plus Medicare payroll taxes, carried interest gets taxedthough the indulgence of the IRS as Sheppard puts itas long term capital gains, at a current top rate of just 15%. (To oversimplify: the carried interest share, when awarded, supposedly cant be valued, and so the IRS lets the money managers elect to value it at zero and then have their future income taxed as if they were partners who had risked their own capital in the fund.) After Romney left Bain in 1999 to run the Salt Lake City Olympics, he negotiated a deal that gave him carried interest in Bain funds set up for a decade after his departureand hence a stream of retirement income taxed at low rates. By contrast, executives of big public companies get taxed on their cushy deferred compensation at the 35% rate. Today, the Wall Street Journal expands on Graetzs observation, posting materials here from a 2008 legal continuing education presentation by that partner from Romneys trustees law firm, Ropes & Gray. In his presentation, the partner noted that based on the income tax valuation of zero the IRS had allowed for carried interest, in the 1990s and early 2000s, some lawyers were advising clients they could give carried interest away and claim it had zero value for gift tax purposes too. (Since then, practitioners have decided, based on various cases and proposed rules, that they must give gifts of carried interests a value greater than zero.) The Romney campaign wouldnt tell the Journal if Romney gifted any of his carried-interest rights to the family trust, although there are indications that might well be the case. Oh, yeah. And then there are the 950 pages of Bain-related documents Gawker posted on the web on Thursday. No, there were no great revelations in those documents. But as The New York Times reports here, they seem to indicate that Bain partners converted $1 billion of straight management fees (which are not contingent on profit, and are taxable at 35%) into additional lower taxed carried interest. Victor Fleischer, a University of Colorado law prof who has written extensively (and critically) on the carried interest break, argues here that such conversion isnt legalalthough theres no evidence the IRS has challenged it. You get the idea: Its the carried interest, stupid. Carried interest is one sweet tax breaka loophole created (like many others benefiting the richest) not by a conscious decision of Congress, but by a combination of smart and aggressive private lawyers and outgunned and gun-shy IRS officials. It is, in other words, a good example of what some folks think is wrong with the way our tax code currently operates. For tax reformers, Mitt Romneys income and gift tax returns could provide a unique teachable moment. Of course, theres nothing stopping the politicians (even without seeing Romneys returns) from closing the carried interest loophole nothing, that is, other than fear of angering billionaire donors. Most famously, billionaire Stephen Schwarzman, co-founder and CEO of The Blackstone Group, compared President Obamas and fellow Democrats attempts to tax carried interest at 35% to Hitlers invasion of Poland. (He later apologized for that comment.) So whats Romneys position on the taxation of carried interest? As Fortune notes here, during the last presidential campaign, Romney opposed ending the carried interest break. This time around, he has yet to say. [url]http://www.forbes.com/sites/janetnovack/2012/08/24/romneys-taxes-its-the-carried-interest-stupid/[/url] [/QUOTE]
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