Rep. Levin Re-Introduces Legislation To Tax Venture Capital Fund Carried Interest As Ordinary Income

 

As if the venture capital industry did not have enough to worry about, with the Treasury’s proposal to require venture funds above a certain size (not yet specified) to register with the SEC, it also appears that the effort to tax their “carried interest” as ordinary income will remain in the mix.  Representative Sander Levin, of Michigan, re-introduced legislation last Friday that would tax the carried interest of venture capital funds as ordinary income.

Excerpts from his press release (which can be found on the House Ways and Means Committee web site) are below:

 “Washington, DC – Rep. Sander Levin today reintroduced legislation to tax carried interest compensation at the same ordinary income tax rates paid by other Americans.  Currently, the managers of private investment partnerships are able to receive compensation for these services at the much lower capital gains tax rate rather that the ordinary income tax rate by virtue of their fund’s partnership structure.

“This is a basic issue of fairness,” said Rep. Levin. “Fund managers are receiving compensation for managing their investors’ money.  They should not pay the 15% capital gains rate on their compensation when millions of other hard-working  Americans, many of whose income is performance-based, pay ordinary rates of up to 35%.  The President’s budget recognizes that this is unfair.  The House of Representatives has recognized that it is unfair, and this year I hope we can act to change the law.”

The legislation clarifies that any income received from a partnership, capital or otherwise, in compensation for services provided by the employee is subject to ordinary tax rates.  As a result, the managers of investment partnerships who receive a carried interest as compensation will pay regular income tax rates rather than capital gains rates on that compensation.  The capital gains rate will continue to apply to the extent that the managers’ income represents a reasonable return on capital they have actually invested themselves in the partnership.

“This proposal is not about taxing investment, it’s about ensuring that all compensation is treated equally for tax purposes.  Anyone who actually invests money in these funds will continue to receive capital gains treatment, including the managers.  So there is no reason to expect that the amount of capital available for these kinds of investments will be reduced,” concluded Levin.

Levin introduced similar legislation in the 110th Congress, which was subsequently included in several tax packages approved by the Ways & Means Committee and the House of Representatives.  A similar proposal is also included in President Obama’s FY 2010 budget request.  

Click here to view the legislation.”

More:

“Myth: This change to the taxation of carried interest will harm every “mom and pop” partnership in America.

Fact: The change would only affect those partnerships where service income is being improperly converted to capital gains.

This legislation would have no effect whatsoever on the vast majority of partnerships that are engaged in ongoing businesses and whose profits are already being properly taxed an ordinary income tax rates.  It does apply to investment fund partnerships where the investors in the fund choose to compensate the people managing their assets through a carried interest.  In practice, this means hedge funds, private equity funds, venture capital funds and real estate partnerships.  The reality is that the fund managers and general partners who would be asked to pay ordinary income tax rates on their compensation are a very small, very well-paid group of professionals.  It is also important to note that the bill does not discriminate among partnerships based on the kind of assets they purchase.”

 

 

 

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Proposed Cybersecurity Act of 2009

 Cybersecurity is and is going to be a significant issue in the years to come.  Some of the latest legislative action on this front is the proposed Cybersecurity Act of 2009, which would among other things:

  • Establish the Office of the National Cybersecurity Advisor within the Executive Branch, who would report directly to the President and who would serve as the lead on all cyber matters coordinating with the intelligence agencies as well as civilian agencies. 
  • Require the Commerce Secretary to “develop or coordinate and integrate a national licensing, certification, and periodic recertification program for cybersecurity professionals.”
  • Beginning 3 years after the date of enactment of the Act, make it “unlawful for any individual to engage in business in the United States, or to be employed in the United States, as a provider of cybersecurity services to any Federal agency or an information system or network designated by the President, or the President’s designee, as a critical infrastructure information system or network, who is not licensed and certified under the program.”

The bill would also allow the President to “declare a cybersecurity emergency and order the limitation or shutdown of Internet traffic to and from any compromised Federal government or United States critical infrastructure information system or network.”

For govtrack.us tracking information, see here.

To read Senator Rockefeller’s press release, see here.  

Other news coverage at cnet, engadget, and Mother Jones.

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Whoops–I Didn’t Pay AMT On My ISOs Exercised Prior to 1/1/08. What Do I Do?

 If you didn’t pay alternative minimum tax on your incentive stock option exercises prior to January 1, 2008, and you owe the IRS a bunch of money–don’t worry about it.

The Internal Revenue Code now provides that any “underpayment of tax outstanding on the date of the enactment of this subsection which is attributable to the application of section 56(b)(3) for any taxable year ending before January 1, 2008, and any interest or penalty with respect to such underpayment which is outstanding on such date of enactment, is hereby abated.”

Section 56(b)(3) is the provision which provides that the gain on the exercise of incentive stock options is an alternative minimum tax adjustment.  So, the Code now says, quite literally, that if you owe taxes attributable to the exercise of incentive stock options for a tax year ending before January 1, 2008, and interest and penalties on such taxes, you don’t have to worry about it!

Taxpayers should be aware that the provision is only effective for ISO exercises prior to January 1, 2008, and does not extend into the future.

For more information, see:

 

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Section 409A–What Is It?

 “Section 409A”–Section 409A of the Internal Revenue Code requires the inclusion in income of deferred compensation paid pursuant to a deferred compensation plan that fails to meet certain requirements, or that is not operated in accordance with certain requirements.  

If a deferred compensation plan fails to meet the Code’s requirements, or is not operated in accordance with the Code’s requirements, then all compensation deferred under the plan for the taxable year and all preceding years must be included in gross income for the tax year to the extent not subject to a substantial risk of forfeiture or not previously included in gross income.

If compensation is required to be included in gross income under Section 409A, the tax imposed by 409A for the tax year is increased by interest and an amount equal to 20% of the compensation which is required to be included in gross income.

Compensatory stock options and compensatory warrants are subject to Section 409A, and under Section 409A all such options must be granted at fair market value on the date of grant.  If a compensatory option is granted at below fair market value, the amount that must be included in income is the spread between the fair market value and the exercise price upon vesting, plus 20% of that amount, plus interest.  

Non-compensatory warrants, such as those received in connection with making a loan, are not subject to Section 409A, although they raise other tax issues.

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