House Takes Up Hedge Fund Tax Again

May 13 2008 | 8:37am ET

Hedge fund lobbyists are preparing for round two of their battle to avoid a big increase in their clients’ tax bills.

The powerful House of Representatives Ways and Means Committee is set to reconsider a measure that would eliminate a loophole allowing hedge and private equity fund managers from deferring taxes on offshore compensation, a measure that is expected to add $23.7 billion to their tax burden over the next decade. But the alternative investments community may have a harder time keeping this law off the books.

Rep Charles Rangel (D-N.Y.), the chairman of the Ways and Means Committee, has learned his lesson and plans to append the tax change to a bill extending several popular tax programs, including one, near and dear to many of the Republicans who opposed the deferred compensation provision last year, giving companies a tax break for research and development.

Last year, the provision—along with one that would have closed the so-called “carried interest” loophole—went down after Republican leaders in the Senate and President George W. Bush won their game of chicken with Democratic leaders. At the time, the tax hike was included as part of a bill extending the alternative minimum tax, which would have hit tens of millions of middle- and lower-class taxpayers. The bill passed the House but failed to pass in the Senate, leading to an AMT patch bill without Rangel’s hedge fund tax proposals.

Crain’s Pensions & Investments reports that, without such a favorable environment, some alternative investments industry lobbyists are not so sanguine about their chances. But that doesn’t mean they won’t fight it.

“The offshore funds are active providers of liquidity for U.S. and global investments, including pension fund investments,” Richard Baker, head of the hedge fund lobbying group the Managed Fund Association, told P&I. “This tax proposal, by raising over $20 billion of revenue from the hedge fund community at this turbulent time, is inconsistent with the continued need for hedge funds to invest in the marketplace.”

Baker, who when the provision last raised its head was serving in the House, promised that the MFA “will continue to oppose such efforts this year.”


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