Senators Max Baucus (D-Montana) and Chuck Grassley (R-Iowa) introduced legislation June 14 that would tax as corporations all publicly traded partnerships that directly or indirectly derive income from investment adviser or asset management services.
Baucus, chairman of the Senate Finance Committee, and Grassley, ranking member, hope to clarify an update Congress made to the tax code in 1987 that generally taxes publicly traded partnerships as corporations. However, an exception to that general rule exempts publicly traded partnerships from corporate taxation if they can demonstrate that at least 90% of their income is passive –from dividends, interest, or royalties rather than the provision of services, according to a statement announcing the legislation. But these days, the two Senators argue in the statement, new structuring of investment vehicles may make it possible for partnerships to argue that their income is passive, when it is actually produced by actively providing financial services. The statement notes that private equity firms, for instance, derive most of their income directly or indirectly from investment adviser or asset management services.
“Creative new structures for investment vehicles may blur the lines for the tax treatment of income,” said Baucus in the statement. “We must make the law clear and apply the law fairly, or risk the erosion of our corporate tax base. If a publicly traded partnership makes its money by providing financial services, that active business should be taxed as a corporation.”