November 2nd, 2007 – The House Ways & Means Committee yesterday passed on a strictly partisan basis, the “Temporary Tax Relief Act of 2007,” which proposes two major tax hikes on fund managers. While there is a long way to go on the legislative process, we want you to know where things stand now.
- Starting with tax years of the manager beginning after November 1, 2007, the carried interest for investment managers (but not real estate, oil and gas etc.) would be treated as ordinary income from performance of services. Self-employment tax would also be levied.
- Deferral of fees from managing offshore funds would not be permitted, starting with services performed after December 31, 2007. Deferrals from prior years would be taxed no later than the last year of deferral beginning in 2016 or the taxable year in which the services providers is no longer subject to a substantial risk of forfeiture. Rules for determining when the substantial risk of forfeiture no longer exists would be provided by regulations.
Also important news for the offshore fund industry is: - U.S. tax-exempt organizations will no longer be required to invest in offshore funds in order to avoid the unrelated business income tax (UBIT) with respect to long securities in a margin account (the debt-financed property rules). U.S. exempts could avoid UBIT by investing in a domestic partnership. This rule would be effective for sales or exchanges after the date of enactment, with certain grandfathering rules.
These three rules are contained in the much longer bill introduced a few days earlier by House Ways & Means Committee Chairman Charles Rangel (D-NY).
The two provisions attacking fund managers are part of a package of tax hikes to offset a costly temporary reduction of the Alternative Minimum Tax (AMT), which the Democrats have vowed to see enacted this year.
The 2007 Act faces very stiff opposition in the Senate, and the President is almost certain to veto it if reaches him. We will continue to update you on developments.
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