Congress Considers Changes to Tax Rules for Hedge Funds and Private Equity Funds

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Congress Considers Changes to Tax Rules for Hedge
Funds and Private Equity Funds
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The Need for Revenue

• It shall not be in order in the Senate to
  consider any direct spending or revenue
  legislation that would increase the on-budget
  deficit or cause an on-budget deficit for any 1
  of 4 applicable time periods as measured in
  paragraphs (5) and (6).
• --S.CON.RES.21 (Cong. Budget Resolution)

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Political/Tax Policy Concerns

• Blackstone CEO Collected 400M in '06
• -Associated Press (June 11, 2007)
• In sum, the tax treatment of a partnership
  profits interest provides deferral benefits that
  go beyond what one might achieve with an
  economically equivalent transaction . Although
  this is consistent with subchapter K principles,
  these principals are in tension with other
  aspects of the tax Code (such as sections 83 and
  7872) that argue for taxing human capital in an
  economically accurate manner.
• --Professor Victor Fleischer, Two and
  Twenty

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• Would amend section 7704(c) to exclude, from the
  qualifying income exception, any PTP that
  directly or indirectly has income from
• services provided by an person as an investment
  advisor or as a person associated with an
  investment advisor, or
• asset management services provided by any such
  person or related person in connection with the
  management of assets with respect to which such
  services were provided.

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• The four categories of services
• Advising the partnership as to the value of any
  specified asset.
• Advising the partnership as to the advisability
  of investing in, purchasing, or selling any
  specified asset.
• Managing, acquiring, or disposing of any
  specified asset.
• Arranging financing with respect to acquiring
  specified assets.

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Political Perspective Senate
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Political Perspective House
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Key Issues

• What is the correct tax policy?
• In most circumstances the current system of
  taxation, though based on administrative
  convenience, ultimately reaches what is close to
  a proper result. And it is hard, both
  practically and conceptually, to draft a broad
  rule that reaches a better one.
• --Professor Howard Abrams, Tax Notes
  (July 16, 2007)

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Key Issues

• 2. Revenue How much revenue is generated by
  options that are practical?

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Key Issues

• 3. Economic Effect
• Hedge and PE funds provide a good deal of
  liquidity in the markets and help the markets
  work more efficiently . In private equity, in
  particular, they play an important role in the
  market for corporate control.
• It might not affect their activities, but it
  might affect their locations.
• --Fed Chairman Bernanke

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Key Issues

• 4. Complexity.
• The current tax treatment of carried interests
  provides certainty for taxpayers in planning
  their transactions and, at the same time, is
  administrable for the IRS.
• --Eric Solomon, Assistant Treasury Secretary
  for Tax Policy

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Questions?
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Congress Considers Changes to Tax Rules for Hedge
Funds and Private Equity Funds