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GOP legislator wants to boost tax on carried interest

Michigan Congressman Dave Camp on Wednesday offered a tax proposal he said would “clean up” the carried interest provision that lets private equity partners pay lower taxes on large portions of their incomes. Camp’s plan drew little support from other Republicans.

Week’s Top Posts Focus on IRRs for UC and Florida, Q3’s Most Active Acquirors, Solyndra Fallout

Time to catch up on the stories your colleagues found most compelling on peHUB this week. Here are the top 10 posts that garnered the most pageviews from regular readers from Sept. 19 to Sept. 23.

One: Trouble Making Ends Meet: Top 10 Cash Returning Funds In Cal Regents’ Venture Portfolio (Slideshow)by Mark Boslet
Two: Slideshow: Face Scrubbers, Balloon Trips: 16 at CalPERS Face Fines for Alleged Gift Violations (subscribers only) — by Gregory Roth
Three: Slideshow: Q3’s Most Active Buyersby Bernard Vaughan
Four: Slideshow: Top-Performing PE/VC Funds for State of Floridaby David Toll
Five: Wringing Money from a Flagging Venture Fund — for a Price — by Connie Loizos
Six: Blackstone Looks to Advise Startupsby Luisa Beltran
Seven: Pressure on Solyndra Backers Intensifiesby Roberta Rampton, Reuters
Eight: Soros, Schwarzman Move Up On Forbes 400 Richest Listby Luisa Beltran
Nine: Obama Pitches Changes to Carried Interest; PEGCC Rebuts “Buffett Rule”by Luisa Beltran
Ten: MassPRIM Loses Second PE Managerby Gregory Roth

Buyouts Video: Steve Klinsky of New Mountain Capital

President Obama’s efforts to change rules on carried interest are misguided, said Steve Klinsky, founder and chief executive of New Mountain Capital, in a wide-ranging video interview with Reuters Insider and sister magazine Buyouts. The entire 4-minute video can be viewed here.

Carried interest, said Klinsky, is “something very different from salary, something very different from bonus. You take a business, you spend years building value, and if you do in fact sell it at capital gain, you get charged at capital gains rates. That’s what carried interest means.” He said “hopefully people will look at it more fairly and level-headedly.”

Reflecting on the financial crisis, he said private equity got caught up in the rage directed at Wall Street, even though private equity itself had little to do with the crisis itself. “We got caught up in that spirit of revenge,” he said.


Today in Carried Interest: Some People Still Care

The carried interest taxation debate is fast becoming as irrelevant as “The Decision.” Only a few die-hards still believe that persuasive arguments could revive meaningful legislation, while the rest of us despair at Democratic spinelessness and Republican obstruction.

But God bless ’em for trying.

Today, the Kauffman Foundation’s Paul Kedrosky and Harold Bradley penned a Bloomberg Op-Ed, arguing that the IRS should treat carried interest as ordinary income. Not as some sort of ordinary income/capital gains hybrid, but as the same tax that the rest of us pay (or at least those of us without active lobbies in DC). They included the following rebuttal to those who claim carried interest is comparable to homeowner equity:


Carried Interest Tax Change (Is Still) Dead

Senate Democrats are all back-slaps and giggles today for getting financial reform out of conference, but they also managed to bungle the carried interest taxation issue. As a client alert from law firm Weil Gotshal sums up the situation:

On June 24, 2010, the Senate failed for a third time to pass a procedural vote which would have sent the proposed carried interest legislation (H.R. 4213) to the Senate for a full vote on the bill. Senate Majority Leader Harry Reid (D-Nev.) has announced that the Senate is moving on to other matters. Although no further action is currently pending in the Senate on the proposed carried interest legislation, it is possible (and perhaps likely) that the legislation will be re-introduced into the Senate in the not too distant future. We will continue to apprise you of any further developments in this area.

The legislation didn’t die because of carried interest, mind you, but because Harry Reid and company chose to lump it in with a “Jobs Extenders” bill that ran into unbreakable Republican opposition (“no bailouts when we’re not in charge”).

The Great Escape: Could Private Equity Avoid Most New Regulation?

This summer was supposed to represent a regulatory tipping point for private equity, as U.S. and European legislators pledged to close tax loopholes and reduce perceived systemic risk.

Private equity firms would have to register their funds, and provide additional disclosures. Carried interest would be taxed as ordinary income. U.S. banks would be required to divest private equity holdings, while European institutions would effectively be banned from serving as limited partners in North American or Asian funds.

It was almost as if regulators had discovered a speck of residual shine on private equity’s Golden Age, and were determined to dull it down.

But a funny thing happened on the way to the reckoning: Many of the proposed changes — including some that many PE pros have accepted as fait accompli — are being watered down, postponed or abandoned.


New Carried Interest Study Struggles To Explain Itself

The Senate today takes up the carried interest taxation issue, which means it’s time for another industry study about how increasing taxes on PE partnerships will cost the nation fortune and jobs (last part emphasized, since the relevant legislative language is part of a jobs bill).

This one comes from the Private Equity Council, which argues that each “one percentage point increase in the effective tax rate on private equity investment is associated with a $1.8 billion decline in annual private equity investment.”

The study (download here) claims to have “detrended” macro-economic changes, in order to make tax rate changes the most significant variable. It also emphasizes that those $1.8 billion decreases are relative to expected private equity ebbs and flows (i.e., it does not necessarily mean that a 1% change today results in a $1.8b decrease from current levels — but rather a $1.8b decrease from what the level otherwise would be).


Carried Interest Consequence: Smaller Funds, More “Skin in the Game”

Last week I discussed possible consequences of changing the tax treatment of carried interest, in terms of investor behavior. Things like new fund structures, increased exit activity before the tax hike kicks in, etc.

Here’s one more, particularly for venture capital firms: Smaller fund sizes with larger general partner contributions.

How come? The main reason is that ROI on general partner contributions will continued to be taxed as capital gains, as GPs in this case really are acting as LPs. The higher the percentage of GP carry, the lower the percentage of returns taxed as ordinary income. The downside here is that it could be harder for younger partners to earn significant carry (because they don’t have as much existing bank), but it could be partially countered by reallocating fee streams.


Game On: Floor Debate Begins on Carried Interest Tax Change

The U.S. House of Representatives has just begun floor debate on the so-called “tax extenders bill” (HR 4213), which is where the carried interest tax change is housed. You can watch it live at http://houselive.gov

There has been a lot of back-and-forth movement on this issue over the past 24 hours, including possible changes to that 75/25 split and possible changes to when the change would become effective. It is expected to come to a vote today, at which point the Senate can have at it (even though they aren’t expected to get to it before recess).

Yesterday we published a letter sent by the NVCA to its members, which basically highlighted the legislation’s state of flux. A reader commented that “This must be killing you Dan, you really wanted to see the ‘VC carry’ get taxed as ordinary income.”

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