Schumer Bill To Raise Tax On All Investment Partnerships

by Leroy Baker, Tax-News.com, New York

15 August 2007

Sen. Charles Schumer (D - NY) is drafting legislation that will tax as ordinary income the carried interest earned by all investment partnerships - not just private equity and hedge firms, as currently proposed in the Senate.

A spokesman for Schumer told the Wall Street Journal in a report published on Wednesday that Schumer, a member of the Senate Finance Committee, is in favor of extending current proposals drawn up by committee chairman Max Baucus and ranking Republican Chuck Grassley, because they represent a "fairer and broader approach" to the issue.

"He favors taxing carried interest as ordinary income because this will generate more revenue and can be applied equally across all industries," the spokesman stated.

As a result, other types of investment partnerships, such as real estate, timber, and oil and gas funds would see their carried interest taxed at ordinary income tax rates up to 35% - instead of capital gains tax rates of 15% - if such a bill is approved. While the Baucus/ Grassley bill also addresses the issue of the tax treatment of carried interest, its main focus is to stop publicly traded limited partnerships from benefiting from a corporate tax exemption unavailable to most other types of company.

Treasury Secretary Henry Paulson has attacked tax plans in both House and Senate for narrowly targeting certain industries, but the Bush administration has expressed unease at any tax proposal that could inhibit the raising of capital for investment.

Congress has held a number of hearings on the taxation of private equity and hedge fund partnerships, and more are scheduled to take place when lawmakers reconvene after the summer recess.

Testifying before the Senate Finance Committee last month, Kate Mitchell, a National Venture Capital Association (NVCA) board member and managing director of Scale Venture Partners, asserted that carried interest paid to venture capitalists has always been consistent with capital gains tax philosophy, and should continue to be recognized as such.

"As venture investors, our job is to identify and nurture promising companies," stated Mitchell. "Venture capital is about creating new companies that helped launch Google, Microsoft, Genentech, Starbucks, and eBay. While these companies are household names today, they were once just ideas put forth by entrepreneurs who had not grown a small business before."

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