Sen. Chuck Grassley, the ranking Republican on the Senate Finance Committee,
wants to amend a provision in tax cut legislation passed recently by the House
of Representatives which he says will open a generous tax loophole for hedge
fund managers.
One of the major offset provisions of the Renewable Energy and Job Creation
Act of 2008 (H.R. 6049), which extends expiring tax cuts and was passed by the
House in May, is a measure that would prevent hedge fund managers working for
offshore corporations deferring tax on their compensation. However, according
to Grassley, while this bill has closed one loophole, it has seemingly opened
another whereby hedge fund managers could substantially reduce their tax liability
by donating to charity.
"The House-passed hedge fund proposal allows these hedge fund managers
to avoid paying tax on their offshore deferred compensation if they make a cash
donation to charity equal to 100% of the amount of the offshore deferred compensation,"
he remarked on the Senate floor on Thursday.
Grassley argued that this would disadvantage the average taxpayer because they
are limited in how much they can deduct – even for contributions to charity.
"They can only deduct charitable contributions if those contributions
don’t exceed 50% of their adjusted gross income. So, if a teacher donated
his or her entire salary to a charity, he or she would only be able to claim
about half of that as a deduction. Meanwhile, a hedge fund manager who sheltered
income in the Grand Caymans would be allowed to claim a deduction for the entire
amount of his or her sheltered income," he observed.
Grassley emphasized that he supports the policy of changing the tax treatment
of offshore deferred compensation for hedge fund managers, and urged the Senate
to correct this "giant loophole."
"We should make sure that if we’re going to tax the deferred income,
we don’t leave an escape hatch in the future," he argued.
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