1. Congress Considers Changes to Tax Rules for Hedge Funds and Private Equity Funds

2. The Need for Revenue “It shall not be in order in the Senate to consider any direct spending or revenue legislation that would increase the on-budget deficit or cause an on- budget deficit for any 1 of 4 applicable time periods as measured in paragraphs (5) and (6).” --S.CON.RES.21 (Cong. Budget Resolution)

3. Political/Tax Policy Concerns “Blackstone CEO Collected $400M in '06” - Associated Press (June 11, 2007) “In sum, the tax treatment of a partnership profits interest provides deferral benefits that go beyond what one might achieve with an economically equivalent transaction …. [Although this is consistent with subchapter K principles], these principals are in tension with other aspects of the tax Code (such as sections 83 and 7872) that argue for taxing human capital in an economically accurate manner.” --Professor Victor Fleischer, “Two and Twenty”

5. Would amend section 7704(c) to exclude, from the qualifying income exception, any PTP that directly or indirectly has income from—  “services provided by an person as an investment advisor … or as a person associated with an investment advisor,” or  “asset management services provided by any [such person or related person] in connection with the management of assets with respect to which [such] services were provided.”

7. The four categories of services:  Advising the partnership as to the value of any specified asset.  Advising the partnership as to the advisability of investing in, purchasing, or selling any specified asset.  Managing, acquiring, or disposing of any specified asset.  Arranging financing with respect to acquiring specified assets.

8. Political Perspective: Senate

9. Political Perspective: House

10. Key Issues  What is the correct tax policy? “In most circumstances … the current system of taxation, though based on administrative convenience, ultimately reaches what is close to a proper result. And it is hard, both practically and conceptually, to draft a broad rule that reaches a better one.” --Professor Howard Abrams, Tax Notes (July 16, 2007)

11. Key Issues 2. Revenue: How much revenue is generated by options that are practical?

12. Key Issues 3. Economic Effect “[Hedge and PE funds] provide a good deal of liquidity in the markets and help the markets work more efficiently …. In private equity, in particular, they play an important role in the market for corporate control.” “It might not affect their activities, but it might affect their locations.” --Fed Chairman Bernanke

13. Key Issues 4. Complexity. “The current tax treatment of carried interests provides certainty for taxpayers in planning their transactions and, at the same time, is administrable for the IRS.” -- Eric Solomon, Assistant Treasury Secretary for Tax Policy

14. Questions?

15. Congress Considers Changes to Tax Rules for Hedge Funds and Private Equity Funds