New US Hedge Fund Tax 'Nowhere Close' Says Baucus

by Mike Godfrey, Tax-News.com, Washington

09 May 2007

While Senate Finance Committee Chairman Max Baucus (D - Mon) has expressed concern that hedge fund and private equity fund managers are manipulating the US tax code to reduce their tax bills, he has stated that new legislation to rectify this is a long way off.

Speaking at a National Press Club meeting in Washington D.C. on Monday, Baucus said that Senate tax writers were "nowhere close" to drafting new legislation to ensure that hedge funds and buy-out firms pay what he considers to be an appropriate amount of tax that tallies more closely with their income.

"I'm not close to having legislation, not yet, but I may," he stated. "My view is, first I want the facts. I want to know what's going on here."

Senate Finance Committee staff are currently examining this area of taxation after a closed-door hearing heard from a number of experts on the subject last Monday, including University of Colorado law professor Victor Fleischer, who has written a study of the tax implications of hedge-fund managers' pay, and Internal Revenue Service officials.

It is expected that the review could lead to changes in the tax code in a number of areas for fund managers and companies. One major area of concern for some lawmakers in both House and Senate is the issue of 'carried interest,' the standard hedge fund industry pay structure whereby fund managers take 20% of the fund's profits, plus a 2% management fee. This can enable them to pay capital gains tax at 15% instead of income tax, which is charged at rates of up to 35%. Many in Congress are of the view that this remuneration should be treated as income, not capital gains, and therefore taxed more proportionately.

"The different rate between capital gains and ordinary income puts a lot of strain on the code," Baucus said.

Another concern for some in Congress is the pending initial public offering by Blackstone, the multi-billion dollar US private equity group. Blackstone plans to raise $4 billion by selling a 10% stake to investors, but a controversial proposal in the company's prospectus will see it listing as a partnership, and therefore not subject to corporate income tax.

“If we were treated as a corporation for US federal income tax or state tax purposes, then our distributions to you would be substantially reduced and the value of our common units would be adversely affected,” the company's prospectus stated.

However, Blackstone went on to warn investors that tax law could be changed to force the company to be treated as a corporation.

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