BUZ LIVINGSTON: A tax loophole we should close

Published: Thursday, November 1, 2012 at 06:02 PM.

 

A few years ago, we worked with a soon-to-be former St. Joe senior executive.

The project included review of their sizable deferred compensation package and, like all deferred compensation, its substantial ordinary income tax liability. Interestingly some deferred compensation, through a tax loophole likely not to be closed anytime soon, is not taxed as ordinary income.

“Carried interest,” a euphemism for hedge fund and venture capital distributions to principals, has the much more favorable capital gains rate (15 percent) rather than the more burdensome ordinary income rate (35 percent).

The logic behind favorable capital gains rates stands to reason. You have to own the investment for a one-year minimum; most importantly, your capital is at risk. Back during Walton County’s real estate bull market, speculators held property for one year to take advantage of lower capital gains rates.

When the music stopped, well, taxes became the least of their worries. Personally speaking, an out of control fire destroyed a timber stand. Not only were the trees I planted ruined; in the interim timber prices plummeted. With any long-term project, your investment often faces multiple hurdles.

Conversely, hedge fund distributions to owners are not at risk; only investors bear that burden.  If no profits transpire, then investors are out of luck, not the big Kahunas. Like Fox News, I’m fair and balanced so it does not matter if the recipient is liberal George Soros, sometimes conservative/ sometimes moderate Mitt Romney or my Bronxville, N.Y., cousin. No one in this crew pays ordinary income tax rates on what is arguably deferred compensation. 



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