10 May 2010

Real Estate Group Pushes to Soften ‘Carried Interest’ Tax Rise

Bloomberg / Business Week

A real-estate executives’ trade group is seeking to soften the impact as Congress moves this month to increase the tax on managers of investment partnerships.

The Washington-based Real Estate Roundtable is proposing alternatives to a tax increase lawmakers are considering to help fund a jobs bill that may be voted on before the May 31 Memorial Day holiday, said David Pearce Jr., the group’s vice president and counsel.

“We are resigned to the fact that they need revenue,” Pearce said in an interview yesterday.

The roundtable represents senior executives of public and private commercial real estate companies. They are the largest group that would be affected by the proposed tax increase on so- called carried interest, the share of profits that is paid to fund managers. That share is taxed at the 15 percent capital gains rate; some lawmakers want to more than double the rate.

For the past several years, the real-estate group has lobbied successfully against raising the tax, joined by others who would be affected -- executives of private equity firms, hedge funds and venture capital funds.

House Ways and Means Committee Chairman Sander Levin, a Michigan Democrat, said yesterday a tax increase on the profits paid to fund managers will probably be included in the jobs measure. The bill would extend unemployment benefits, the Build America Bonds program, subsidies to help the jobless buy health insurance, and a series of business tax cuts that expire every year.

20 Percent of Profit

Managers of investment partnerships typically are paid 2 percent of fund assets as an annual management fee and 20 percent of the profit earned for investors above certain levels. While the management fee is taxed as income, the share of profit is taxed at the lower capital gains rate. The rate is slated to rise in 2011 to 20 percent from the current 15 percent.

Levin previously proposed legislation to classify carried interest as ordinary income, subject to a top rate of 35 percent. Levin’s proposal has been approved by the House three times in recent years and died each time in the Senate.

Pearce said his group would prefer either a blended tax rate that combines the capital gains and ordinary income tax rates, or keeping the capital gains rate for profits from long- term investments of between two and five years.

“We’ve been talking about a holding period or a blended rate,” Pearce said. “We think that’s the direction to move in.”

Obama’s Position

Senate Democratic leaders are being pressed to approve a carried-interest tax increase by President Barack Obama’s administration, which has twice sought the higher taxes in budget requests.

Senator Charles Schumer, a New York Democrat, said last month the chamber was considering adopting the House provision. A jobs measure containing the provision likely would require 60 votes to pass the Senate. An earlier version of the jobs bill that didn’t contain the tax increase on fund managers passed the Senate 62-36 in March, with four Republicans joining all the entire Democratic caucus in favor.

Pearce said his group’s chief concern is persuading lawmakers to continue classifying the profits interest as capital income rather than ordinary earnings, even if the rate is higher. The group is pointing out that current law already sets different rates for different types of capital income, he said. For example: Gains on securities qualify for a 15 percent tax rate, while collectibles such as art and antiques are taxed at 28 percent.

Colorado Professor

Victor Fleischer, a University of Colorado at Boulder law professor whose 2006 paper on the issue inspired the initial congressional action, said he expected lawmakers may be receptive to the industry’s arguments.

“Congress should consider all the options,” Flesicher said. “Conceptually, I think it ought to be treated as ordinary income, but if a blended rate is what it takes to get change through, then that’s what it takes.”

Lobbying groups for some other industries said they were continuing to fight the higher levy outright.

“We’re not accepting this as a fait accompli,” said Emily Mandell, vice president of strategic affairs for the National Venture Capital Association. “We continue to put forth the same message, we have not waived from our position. There are a number of proposals being floated by different constituencies. Our proposal is that venture capital investment or investments in start-ups should continue to receive the capital gains rate.”

Robert Stewart, a spokesman for the Private Equity Council, a Washington trade group representing firms such as KKR & Co. LP and the Blackstone Group LP, has declined to comment this month as the issue gained steam in Congress. He was unavailable for comment yesterday.

Steve Hinkson, a spokesman for the Washington-based Managed Funds Association, which represents hedge funds, declined to comment.

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