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Grassley Urges Closure Of Hedge Fund Loophole In House Bill

by Mike Godfrey, Tax-News.com, Washington

14 July 2008

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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