Taxes on Carried Interests

[Topper]

http://taxguide.completetax.com/text/Q06_7000.asp

Royalties taxation.

[byu71]

http://taxguide.completetax.com/text/Q06_7000.asp

Royalties taxation.

Instead of making me read all that, is it OI or capital gains.

[byu71]

I appreciate the effort, and I've devoted a lifetime to helping others achieve capital gain treatment whenever possible, but I'm still not seeing it. Using the argument you provided, shouldn't that apply to corporations as well? The corporation's officers' job is to maximize the wealth of its shareholders. If
they succeed, their shareholders receive capital gains and dividends that receive preferential tax treatment. Assuming the returns are huge, and the board of directors believes the officers are entitled to megabonuses beyond the very hefty salaries the officers received, should those bonuses also be given preferential tax treatment, since their source was the capital gains their efforts produced?

I'm still of a mind that a return on contributed capital should be given preferential treatment, but any return that results from one's efforts, no matter how valuable, should be treated as compensation (i.e., ordinary) by the recipient, even if the recipient regards his/her brilliance as capital.

I wish Investment Advisors had better lobbyist's. Income from my fee based accounts would then be taxed as capital gains.

[PaloAltoCougar]

Intellectual capital?? Maybe I don't understand what that is. Do royalties on books get treated as OI or capital gains?

I think this depends on whether the recipient has essentially given up the rights to the book, composition, patent, etc. In other words, if it can be treated like a sale, then the inventor/writer would get capital gain treatment. But if it's a royalty or license fee for the nonexclusive use by someone else of the IP, then I think it would be ordinary income. But this is where I call tax lawyers or accountants who actually knows what they're talking about.

http://www.csmonitor.com/Business/Ro...s-tax-loophole

It seems unjust.

At the very least, it certainly "seems" unjust, and I doubt the best efforts of the experts to explain the carried interest to the masses will ever dispel that impression.

[Moliere]

I appreciate the effort, and I've devoted a lifetime to helping others achieve capital gain treatment whenever possible, but I'm still not seeing it. Using the argument you provided, shouldn't that apply to corporations as well? The corporation's officers' job is to maximize the wealth of its shareholders. If
they succeed, their shareholders receive capital gains and dividends that receive preferential tax treatment. Assuming the returns are huge, and the board of directors believes the officers are entitled to megabonuses beyond the very hefty salaries the officers received, should those bonuses also be given preferential tax treatment, since their source was the capital gains their efforts produced?

Yeah, seems like a really gray area and your corporation example makes sense, except that a corporation is not a pass-through entity and thus any returns not held in stock will be taxes as OI (dividends don't get preferntial treatment....at least not that I remember....in fact they get taxed at the corporate level and then taxed at the personal level).

I guess I just see the difference as pertaining more to the legal entity, which I guess is a silly argument but our system was set up that way. Earnings made by a corporation are taxed at the corporate level with the salaries (up to $1 million) and bonuses being allowed to be deducted for taxes. They are then taxed at the personal level. Earnings of a partnership are flowed-through to the partners based on the nature of the income (capital vs. ordinary).

FTR, I'd support a change in the character of carried interest income from capital to ordinary...but that's because I don't own any carried interests

[PaloAltoCougar]

BTW, does anyone know if Newt tried to eliminate capital gains treatment for carried interests when he was Speaker of the House? If so, why did he fail? If not, why is he permitted to make political hay out of Romney's income now?

[byu71]

http://www.csmonitor.com/Business/Ro...s-tax-loophole

It seems unjust.

It isn't about being just or unjust. John Edwards made tons consulting for a hedge fund. Chelsea Clinton went to work for a hedge fund. Rohm Emmanuel made millions after his stint with Clinton working for a hedge fund.

There is a reason Chuckie Shumer while talking the talk about equality, protects Wall St. Anything that can creat greater volume and more fee's for New York, the dems in NY will be all for it.

The tax laws aren't based on sound accounting principles. They are based on social engineering and greecing the politicians palms.

[Topper]

Instead of making me read all that, is it OI or capital gains.

Topper is a simpleton, but as Topper reads it, for most purposes it appears to be ordinary income. Yet Topper is often confused by the tax code.

[byu71]

Topper is a simpleton, but as Topper reads it, for most purposes it appears to be ordinary income. Yet Topper is often confused by the tax code.

I would guess you are right. I will bet a big chunk of Newt's income comes from books and things like that. A lot of "intellectual property" type things and he obviously is being taxed at ordinary income rates.

[Viking]

Yes to any of the above, if it's proprietary to the contributor, and is identifiable (can be reduced to a writing) and tradeable. If it's just the general smarts of the contributor, then no.

Take the case of an inventor, founder of company X. Founder invents product alpha and owns 100% of company X. Product Alpha is a huge hit. Founder sells shares of company X to the public. Should Founder pay ordinary or long-term rates on his gains?

Fast forward two years. Founder has invented product beta. Beta, like alpha, is a huge success. Company X shares soar.

Founder decides to sell shares in a secondary offering.

Should his gains be taxed at ordinary or L-T rates?

[byu71]

Take the case of an inventor, founder of company X. Founder invents product alpha and owns 100% of company X. Product Alpha is a huge hit. Founder sells shares of company X to the public. Should Founder pay ordinary or long-term rates on his gains?

Fast forward two years. Founder has invented product beta. Beta, like alpha, is a huge success. Company X shares soar.

Founder decides to sell shares in a secondary offering.

Should his gains be taxed at ordinary or L-T rates?

He is selling the company, not beta, beta, beta. The sell of beta, beta, beta was taxed at ordinary income rates (corp. ordinary).

Plenty of good ideas have been sprung, but without proper marketing and management, they go nowhere.

I think part of the argument on cap. gains is that you have already paid one tax, the corp. income tax. I don't understand accounting for carried interest. Is there another tax paid like a corporation does?

[Viking]

He is selling the company, not beta, beta, beta. The sell of beta, beta, beta was taxed at ordinary income rates (corp. ordinary).

Plenty of good ideas have been sprung, but without proper marketing and management, they go nowhere.

I think part of the argument on cap. gains is that you have already paid one tax, the corp. income tax. I don't understand accounting for carried interest. Is there another tax paid like a corporation does?

Sure, that's not debatable.

What about the founder's shares?

[byu71]

Sure, that's not debatable.

What about the founder's shares?

I would say he took stock in the company instead of upfront cash. If he had taken upfront cash for his idea, he would have been taxed at ordinary income wouldn't he?

There are those who argue there should be no capital gain tax, because the owner of the corporation is being taxed twice.

[byu71]

Viking, here is another question I have that you can probably answer.

Paulsen, can't remember his first name, made lots and lot of money for people. I would guess he got Cap. gains treatment. This year though he has lost his butt. Does he then have to write his losses off at only 3,000 a year (assuming he has no other capital gains) or can he write them off all at once.

[Viking]

Viking, here is another question I have that you can probably answer.

Paulsen, can't remember his first name, made lots and lot of money for people. I would guess he got Cap. gains treatment. This year though he has lost his butt. Does he then have to write his losses off at only 3,000 a year (assuming he has no other capital gains) or can he write them off all at once.

My pop is the tax lawyer, not me. But I would say it depends on his structuring. His offshore proceeds have zero tax, thus zero deduction as long as they stay offshore.