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December 01, 2007 at 02:00 AM
With a deadline to fix the Alternative Minimum Tax (AMT) by year-end fast approaching, Congress is in a mad dash to find alternative sources of revenue to plug the hole that would be created if 25 million taxpayers were saved from the AMT. Besides tax hikes, lawmakers’ revenue-boosting targets of choice are deep-pocketed hedge funds.
Two recent bills have been introduced that would curb the ability of high-wage taxpayers to defer unlimited amounts of their offshore compensation–House Ways and Means Chairman Charles Rangel’s (D-New York) Tax Reduction and Reform Act of 2007 (H.R. 3970) and Senator John Kerry (D-Massachusetts) and Rep. Rahm Emanuel’s (D-Illinois) bill, The Offshore Deferred Compensation Reform Act (S 2199).
Unlike average Americans who are limited to the amounts of income they can defer into 401(k) and other retirement accounts, U.S.-based hedge fund managers who operate offshore investment funds can defer unlimited amounts of their compensation. Reforming the tax code will help ensure that all Americans are on a level playing field when it comes to paying taxes on the money they’ve earned, Kerry and Emanuel argued when introducing the bill.
As Brian Snarr, a partner at Morrison Cohen in New York attests, U.S. hedge fund managers who manage funds for onshore accounts “typically take an equity position, so they are partners with the [investors] they manage the money for.” When it comes to managing money for offshore investors, however, hedge fund managers usually take a fee instead. When hedge fund managers become successful, Snarr says, they defer taking all of their fees at once, and instead treat the money as if it were invested in the hedge fund or in Treasury bills and collect it later–say in five years.
Section 409(A) of the tax code currently governs deferred compensation, and as Snarr notes, it covers all sorts of workers–hedge fund managers, corporate managers, and employees–when it comes to deferred compensation. Post Enron, Congress has taken a keen interest in deferred compensation, since some of the top guys “escaped with their deferred comp and left the stockholders and creditors hanging,” Snarr says.
But Snarr questions whether the Kerry/Emanuel bill will apply to all types of workers who have deferred compensation plans. The bill is effectively saying “that if you’re managing money for someone, and they’re not in the U.S., then you can’t defer” your compensation, Snarr says. “Is that just hedge funds? What if you are managing money for someone in England, Japan, or Germany–you can no longer say ‘pay me later?’” Deciding which workers to single out, he says, “is going to prove difficult.”
