By Steven M. Etkind and Roger D. Lorence
The Treasury Department has released its lengthy explanation of the President’s wide-ranging tax proposals. The President aims to deliver on both tax “fairness,” especially the ending of perceived tax abuses and “loopholes,” and increasing federal tax revenues. Particularly hard hit would be U.S. businesses with operations outside the U.S. and the financial services sector. Because of the very large number and diversity of the President’s proposals, we outline below only those of most interest to the financial services industry. If the entire package were to be enacted, this would be one of the most sweeping revisions to the tax law since the enactment of the Internal Revenue Code of 1986.
Repeal of the Carried Interest
Under current law, the manager of a domestic partnership may receive an incentive allocation of partnership profits which is treated as a share of the various income components realized by the partnership that taxable year. This special allocation of profit is termed the “carried interest” and has been a major spur to development in the oil and gas, real estate and investment fund industries. The President proposes to repeal the carried interest rules for taxable years beginning after December 31, 2010. The carried interest would be taxed as “services partnership interest” income that would be ordinary income, whatever the character of income generated by the partnership, and would be subject to self-employment taxes. Only a manager’s profits on their own capital interest in the partnership would be exempt from these rules. Individuals performing services holding derivatives instruments in that entity would also be subject to ordinary income treatment with respect to the derivative interest. If enacted, this would likely reduce the “mini-master” structure of offshore hedge funds which are structured to claim the benefits of the carried interest.
Commodities Dealers: Partial Repeal of Section 1256
Current law treats U.S. persons who are dealers in commodities, equity options, and commodity derivatives as generally entitled to treatment under Section 1256 of the tax law whereby 60% of gain or loss is long-term capital gain and 40% is short-term capital gain (for so-called “60/40″ contracts). The favorable 60/40 treatment (currently a blended maximum rate of 23% for gains) is, the President contends, unwarranted, particularly compared to tax treatment of other types of dealers, whose gains and losses are ordinary income. The President proposes that dealer income of commodities dealers, including dealers in equity options, be taxable as ordinary income, effective for taxable years beginning after the date of enactment.
Tags: Financial services, Income tax, Internal Revenue Code, Internal Revenue Service, tax, Tax forms in the United States, United States, US$
