US Fund Tax Hike May Come In 2008, Says Reid

by Mike Godfrey, Tax-News.com, Washington

18 July 2007

Senate Majority Leader Harry Reid (D - Nev.) has reportedly said that Senators will not take up the issue of the tax treatment of certain limited partnerships, such as private equity and hedge funds, until next year.

Reid made the revelation in an interview with Bloomberg, telling the news service that new legislation affecting limited partnerships "won't be this year".

Reid also told Bloomberg that he favoured more wide-ranging legislation than that currently being proposed, in order to include partnerships beyond private-equity firms, such as those that invest in commercial real estate and oil and gas pipelines. Any new measures "shouldn't apply just to the private-equity groups, it should apply to all that are similarly situated," he stated.

Legislation proposed by Senate Finance Committee Max Baucus and ranking Republican Chuck Grassley would clarify the US tax code so that publicly traded partnerships directly or indirectly deriving income from investment adviser or asset management services would not be entitled to an exemption from corporate tax available to firms whose income is at least 90% passive – derived from dividends or royalties, for instance.

Broader legislation proposed in the House attacks the controversial 'carried interest' issue, and is designed to ensure that investment fund managers who take a share of fund profits as compensation for investment management services would be taxed at an appropriate ordinary income tax rate up to 37.9%, and not at the investment income rate of 15%.

The proposals have been criticised by senior administration officials, such as Treasury Secretary Henry Paulson, who fear a reduction in US competitiveness, and President Bush has hinted that he would be prepared to veto such measures.

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