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Grassley To Pair Private Equity Tax Proposal With AMT Fix

by Leroy Baker,, New York

10 August 2007

Sen. Chuck Grassley (R - Iowa) has said that he intends to pair legislation changing the corporate tax treatment of certain investment funds with more popular measures reducing the impact of the alternative minimum tax on middle-income taxpayers when Congress returns from its summer recess.

Commenting on the fund tax proposals, Grassley revealed in an interview with Bloomberg in his home state of Iowa that: "This is going to come when we deal with the alternative minimum tax."

By linking the proposals affecting the taxation of publicly traded limited partnerships - such as private equity and hedge funds - with the AMT proposals, Grassley is hoping that the former, which is more politically sensitive and is opposed by the Bush administration, stands a much better chance of being approved.

Last month, Grassley unveiled his AMT 'safeharbour' bill. Under the AMT Penalty Reduction Act of 2007, in computing tax for purposes of the penalties in the tax code dealing with estimated tax, a taxpayer would be permitted to disregard the alternative minimum tax if the individual was not liable for the alternative minimum tax for the preceding tax year. This would ensure that some 23 million American taxpayers would not have to calculate their tax liability under the AMT system this year. Originally conceived in the 1960s, the AMT was only supposed to catch a tiny percentage of wealthy taxpayers who could reduce their tax liabilities to little or nothing through the use of deductions and exemptions, but the law was never indexed to inflation and is widely disliked.

Less popular, at least with the private equity industry and the Treasury Department, is the legislation proposed by Senate Finance Committee Max Baucus and ranking Republican Grassley, which 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. Treasury Secretary Henry Paulson has been critical of this proposal as being too narrowly targeted and potentially detrimental to US financial competitiveness. President Bush has also hinted that he would vote against any measure increasing taxes on the investment industry.

Last week, House Ways and Means Committee Chairman Charles Rangel (D - NY) also said that he would couple legislation increasing tax on private equity and hedge fund partners with plans for AMT reform. However, the House proposals go further than the Senate's by calling for the carried interest earned by fund partners to be taxed as ordinary income at rates up to 35%, instead of capital gains at 15%.

According to reports, House Democrat proposals for AMT reform also substantially differ from Grassley's by calling for a 4.3% surtax to be imposed on wealthy households with annual income of more that $500,000. This is intended to raise sufficient revenues to ensure that those earning less than $250,000 annually can be permanently lifted out of the AMT net.

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