Subject: Investment partnership industry says tax hikes in Senate jobs bill are unfair
From: "Eric Schwerin" <[email-masked]>
To: "Hunter Biden" <[email-masked]>, "Devon Archer" <[email-masked]>
Date: Thu, 17 Jun 2010 19:15:16 -0400

*Investment partnership industry says tax hikes in Senate jobs bill are
unfair*

By Jia Lynn Yang and Lori Montgomery
Washington Post Staff Writer
Thursday, June 17, 2010; A14

A week ago, two
lobbyists<http://projects.washingtonpost.com/politicsglossary/general/lobbyist/>
representing
Oaktree Capital Management, one of the nation's largest investment
partnerships, met with congressional tax analysts and Senate aides to
complain about a new tax buried in the Senate jobs bill.

Their worry: That Congress had vastly underestimated the impact that the
measure would have on partnerships, one of the primary ways U.S. investors
raise capital to invest in businesses and real estate.

"It's hard for me to convey how unprecedented and indefensible this is from
the point of view of tax policy," said Oaktree General Counsel Todd Molz,
who joined the meeting by phone. "I get that we're not a sympathetic
industry, but this is changing a fundamental aspect of the tax law."

Oaktree's appearance was arranged by aides to Sen. Evan
Bayh<http://www.whorunsgov.com/Profiles/Evan_Bayh> (D-Ind.),
who went to law school with Oaktree's co-founder and counts the company as a
significant campaign donor. Bayh, among a small group of Democratic senators
sympathetic to the industry's concerns, was contacted by lobbyists as part
of an increasingly frantic campaign to block a tax that would make it far
more expensive to sell investment partnerships.

But on Wednesday, that lobbying campaign appeared to fail as Senate leaders
unveiled a slimmed-down version of the jobs bill that included only minor
changes to a provision that opponents are calling the "enterprise value
tax," and the legislation could be approved as soon as Thursday. Bayh says
he plans to back the bill, despite its effect on Oaktree and other
investment partnerships.
*Latest setback*

This setback comes on top of an unsuccessful effort by lobbyists to kill a
separate tax hike on "carried interest" -- the part of investment managers'
pay earned from the gains of their clients' portfolios. In past years, these
lobbyists were able to fend off the higher tax.

But this year, in the wake of a massive federal bailout of Wall Street,
they've hit a wall: the revenue crunch.

Lobbyists thought they had a better shot at winning on the enterprise value
issue than they did with carried interest. The tax increase on partnership
sales was so obscure that it caught many in the industry by surprise.

"The carried-interest issue has been debated for several years, and those
who defended it lost," said an industry executive close to the discussions
on Capitol Hill. "The enterprise value thing is so new that people are still
getting their arms around it."

Currently, when investors in a partnership sell their shares, any gains on
their original investment are taxed at the so-called capital gains rate of
15 percent.

The latest version of the jobs bill would tax 75 percent of the proceeds as
ordinary income -- which is higher -- beginning in 2011. For any partnership
interest held for more than five years, the split would be 50 percent
capital gains and 50 percent ordinary income. That same tax breakdown would
also apply to carried interest. The net effect would be to tax gains from
the sale of a partnership stake -- even if it was purchased on a public
stock market -- at a higher rate than gains on other stocks.
*Hikes to raise $14 billion*

The carried interest and enterprise value tax hikes would raise $14 billion
and affect managers of private equity firms, hedge funds, venture capital
firms and real estate investment partnerships. Private equity executives,
including Steve Schwarzman of Blackstone Group, have visited Capitol Hill to
argue against the higher taxes, which they consider punitive and unfair.

Selling interests in these firms has become a lucrative business, especially
for the biggest private equity firms. Blackstone Group went public in 2007,
and its partners hauled in $4.7 billion from the deal. Supporters of raising
the partnership-sales tax say the increase is aimed at discouraging firms
from selling partnership stakes to avoid the higher carried-interest tax.

Some moderate Democrats have worried that the partnership-sale and
carried-interest tax increases would hurt the venture capital industry,
which tends to hold assets longer. The revised provision in the jobs bill
seeks to allay those concerns by reducing the tax impact on firms that
retain their investments for several years.

Bayh spokesman Brian Weiss said that the senator's staff invited Oaktree's
representatives to the meeting last week at the offices of the Joint
Committee on Taxation "to provide certain technical data." But the tax issue
was never Bayh's top concern, Weiss said. Such meetings are routine,
according to lobbyists and congressional sources familiar with the
tax-writing process.

After Senate leaders scaled back the cost of the bill and added a housing
tax credit that would benefit Indiana and 13 other states, Bayh told Senate
leaders that he would support the package.

*Staff researcher Alice Crites contributed to this report.*
-- 
Eric D. Schwerin
Rosemont Seneca Partners
(202) 333-1880
[email-masked]