Firm tax may lead to fund tax

Legislation that would tax some private equity partnerships as corporations could result in the investment funds themselves being taxed as corporations, one of the country’s leading private equity law firms said today. “The wording is broad,” said Isaac Grossman, chairman of the tax department of New York law firm Morrison Cohen LLP. “I can see a fund itself having to pay corporate income tax if it’s considered to be publicly-traded,” he said. That would result in higher taxes being paid by private equity funds. Currently, income from such funds is only taxed when it is received by the partners of the funds, which includes public pension funds, hedge funds and wealthy individuals. If the funds are taxed as corporations, the corporate tax rate, generally 35% would also have to be paid. Legislation was introduced Thursday by Senate Finance Committee Chairman Max Baucus, D-Mont., and committee ranking minority member Charles Grassley, R-Iowa, that would tax as corporations all publicly traded partnerships that directly or indirectly derive income from investment adviser or asset management services. The chairman of the House Ways and Means Committee, Charles Rangel, D-N.Y., issued a statement immediately after the legislation was announced applauding the bill. Recent public offerings of private equity and hedge fund management firms, such as the initial public offering by The Blackstone Group L.P. of New York are inconsistent with tax rules applying to publicly traded partnerships, the two senators said in a release. The two senators also wrote Treasury Secretary Henry Paulson as well as Securities and Exchange Commission Chairman Christopher Cox about their concerns. “Investors and shareholders should have confidence of the tax treatment of any investments, particularly in a case where the tax treatment is a critical component,” the letter to Mr. Cox said. If the legislation is enacted, it could result in lower growth for businesses that the private equity firms invest in, along with jobs and gains for public pension plans that invest in the ventures, said David Scherl, chairman and managing partner of Morrison Cohen. “It’s not a cafeteria plan where you can say I like these great returns for these pensions funds, the job creation and business growth, but I want to cut back on the incentives,” received by the managers of the private equity funds, Mr. Scherl said.