Stephen Breitstone, partner at Meltzer Lippe Advantage LLP, presents “Why Aren’t Hedge Fund Managers and Private Equity Fund Managers Taxed the Same Way as You and Me?”
On April 28, 2010, Stephen Breitstone answered that question as he discussed the proposals for taxing hedge fund managers at the final Tax Law Lunch & Learn for the spring 2010 semester. Breitstone, a partner at Meltzer Lippe Goldstein & Breitstone LLP in New York, is an expert on the subject, and travelled to Chicago to address the students and faculty of The John Marshall Law School. He summarized two of his recent articles that appeared in Tax Notes: “Carried Interest Bill—a ‘Death Trap’ for Real Estate Partnerships” (June 22, 2009, Viewpoints) and “Carried Interest Bill—Impact on Real Estate Partnerships” (March 8, 2010, Tax Practice).
“Congress is exploring whether there are abuses in the manner in which hedge fund and private equity fund managers structure their compensation packages.”
The main issue, Breitstone explained, is that Congress is exploring whether there are abuses in the manner in which hedge fund and private equity fund managers structure their compensation packages. Under the current provisions of the Internal Revenue Code (IRC), compensation is taxed at ordinary income tax rates, which for most middle- to upper-income individuals is greater than the favorable rates for capital gains. The perception is that money managers, instead of receiving large investment management fees which would be considered compensation, arrange instead to receive shares of the profits generated by the investment funds (the so-called carried interest), which will be considered capital gains. Legislation introduced in 2009 (HR 1935) would add a new section of the IRC to limit the flexibility these hedge fund and private equity fund managers would have in arranging their compensation to skew more capital gains income than ordinary compensation income. However, one of Breitstone’s greatest concerns is that the proposed language is too broad, and would also sweep in members of real estate investment partnerships. He argues that IRC §707(a)(2) already prevents the abuses that Congress fears, and that provision should be fully implemented before Congress starts adding additional statutory provisions, such as new IRC §710, under the proposed legislation.
The presentation was educational in that Breitstone explained how these managers take on risk with their own capital in starting ventures, and only reap profits in instances where the risk pays off. Although his personal opinion was obviously that either there is no problem with carried interest or, even if there is a problem, that this legislation would go too far in the opposite direction, he did provide both sides of the argument, and encouraged audience members to make up their own minds.
Breitstone heads the Tax Law Group at Meltzer Lippe, which represents clients in Europe, Israel, South America, Australia, and elsewhere. He does sophisticated tax and estate planning for several large New York real estate families, Wall Street investment bankers, hedge fund managers, corporate executives, and others. He has pioneered many novel and sophisticated tax-planning techniques, many of which have come into widespread use. Breitstone has lectured at the NYU Institute on Federal Taxation, the American Bar Association Tax Section, and numerous other organizations on topics such as drafting partnership and LLC operating agreements, foreign investment in U.S. real estate, and income tax and estate planning for leveraged real estate. He is on the board of advisors at NYU’s Institute on Federal Taxation. Breitstone also testified at Congressional hearings about proposed estate tax repeal. He received his BS in accounting from New York University, his JD from Benjamin N. Cardozo School of Law, and his LLM in taxation from New York University School of Law.