Fund Services Alert: Extenders Bill Update

Fund Services Alert: Extenders Bill Update

There [was] no resolution [last] week with respect to the proposed legislation providing for a portion of carried interest to be taxed at ordinary income tax rates. The carried interest legislation was proposed in the tax extender's bill (H.R. 4213) passed by the House on May 28, 2010 (the "House bill"). The Senate has not been able to pass the House bill or any of the proposed amendments to the House bill. House leaders had planned to stay in session for votes today in case the Senate completed its work on the House bill. However, it was announced late yesterday that no further votes will be held, and the House members ha[d] the opportunity to return to their home districts for the weekend. A brief chronology of the recent Senate history of the carried interest legislation is set forth below.

History of the Extender's Bill in the Senate

On June 8, the Senate began debate on an amendment to the House Bill (S. Amdt. 4301). While the House Bill would tax 50 percent of carried interest at ordinary rates until Jan. 1, 2013 and then increase to 75 percent, the amendment would slightly reduce the percentages so that beginning Jan. 1, 2013, 35 percent of carried interest is taxed as capital gains while 65 percent is taxed at ordinary income rates. In addition, the Senate amendment would allow assets held for at least seven years to be taxed at a 45-55 percent split.

On June 9, key House Democrats expressed opposition to the Senate amendment to the House Bill, including the reduced tax increase on carried interest earnings.

On June 10, Senator John Thune (R-S.D.) introduced the Republicans' alternative amendment (S. Amdt. 4376) to the House bill then before the Senate. Thune's amendment would have replaced all of the tax increases in the current amendment with spending cuts or unspent stimulus dollars.

On June 10, Sens. Olympia Snowe (R-Maine) and Mike Enzi (R-Wyo.) introduced an amendment (S. Amdt. 4342) that would strip new, tighter tax rules on Subchapter S corporations from the amendment to the House bill.

On June 14, Senate Majority Leader Harry Reid (D-Nev.) filed a motion to invoke cloture on the House bill in an effort to complete the Senate's version of the legislation by the end of the week. Cloture is the only procedure by which the Senate can vote to place a time limit on consideration of a bill or other matter, and thereby overcome any attempt to block or delay Senate action on a bill or other matter by debating it at length, by offering numerous procedural motions, or by any other delaying or obstructive actions.

On June 15, Senate Democratic leaders were still short of the 60 votes needed to invoke cloture on the House bill.

On June 16, Senate Finance Committee Chairman Max Baucus (D-Mont.) introduced a new substitute amendment (S. Amdt. 4369) that would tax 75 percent of carried interest income at ordinary tax rates (the same level as provided in the House bill). However, this substitute amendment would only impose ordinary tax rates on 50 percent of the carried interest from investments held for more than five years. The Baucus amendment also scaled back on tax increases on principals of Subchapter S corporations.

On June 16, Sen. Thune's amendment to the House bill was withdrawn after it garnered only 41 of the 60 votes needed to overcome procedural hurdles in the Senate.

On June 16, Sen. Reid filed a motion to invoke cloture on the Baucus substitute amendment, setting up a possible cloture vote for June 18.

On June 17, an impromptu cloture vote on the Baucus substitute amendment revealed that Democrats remain four votes short of the 60 that are needed.

Baucus has said the carried interest provisions in his amendments are still in need of a technical change that would make it clear that the founders of partnerships will pay taxes at ordinary income tax rates on 50 percent of the proceeds they get from sales of their shares of the firm, addressing a concern with respect to the taxation of enterprise value (the increase in the value of a business's stock as a result of the returns from the owners' years of building the company).

The material in this publication is based on laws, court decisions, administrative rulings, and congressional materials, and should not be construed as legal advice or legal opinions on specific facts. The information in this publication is not intended to create, and the transmission and receipt of it does not constitute, a lawyer-client relationship. Internal Revenue Service rules require that we advise you that the tax advice, if any, contained in this publication was not intended or written to be used by you, and cannot be used by you, for the purposes of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

This article is republished with permission of Pepper Hamilton, LLP. Further duplication without the permission of Pepper Hamilton, LLP is prohibited. All rights reserved.