Private Equity Avoids One Tax

Obama administration backs off on plan to raise tax on stake sales.

Private equity executives won a major concession in a battle with the Obama administration over plans to raise taxes when selling stakes in their firms, potentially saving billionaires such as Stephen Schwarzman and David Rubenstein hundreds of millions of dollars.

President Barack Obama and Representative Sander Levin separately signaled this month that proposals to raise taxes on investment performance fees, known as carried interest, won’t apply to profits earned when buyout fund founders and other executives sell some or all of their holdings in their firms. The president and Levin, a Michigan Democrat and the party’s top member on the House Ways and Means Committee, previously backed legislation that would have increased rates for carried interest as well as for the so-called enterprise value.

Ordinary Income

Under current law, buyout fund managers pay different tax rates on different types of income. They pay ordinary income rates of as much as 35 percent on asset-management fees. They pay capital gains rates of 15 percent on carried interest or profits-based compensation.

Multiple Attempts

“There have been multiple attempts to address the enterprise value provision within a series of carried interest tax increase proposals,” Steve Judge, president of the Washington-based Private Equity Growth Capital Council, said in a statement. “To date no legislation has been introduced that effectively eliminates a punitive tax increase singling out only private equity, venture capital and real estate partnerships.”

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