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Democrats announce deal on extenders, tax on hedge fund income
By Jay Heflin - 05/20/10 10:50 AM ET

Democrats in the Senate and House have reached an agreement on a package of
tax extensions.

Senate Finance Chairman Max Baucus (D-Mont.) and House Ways and Means
Chairman Sandy Levin (D-Mich.) on Thursday said they'd reached a deal on
legislation extending several tax and spending measures through the end of
this year.

The American Jobs and Closing Tax Loopholes Act will be released Thursday as
the House Amendment to the Senate Amendment to H.R. 4213, the two said.


The bill extends several popular individual and business tax breaks, which
are partly paid for by increasing taxes on a common form of income used by
hedge fund managers to pay themselves. Levin and Baucus reached a compromise
on how to tax "carried interest" which had been a divisive issue for years.

The bill also will prevent a cut in physician payments from going into
effect for the next three years, and will instead offer some payment
increases.

On the hedge fund issue, the compromise reached essentially blends two
different ways of taxing carried interest income.

The bill would change the tax code so some carried interest income would be
taxed as ordinary income, which could be subject to a maximum tax rate of 35
percent. Carried interest is now taxed at the capital gains tax rate of 15
percent, and Levin has long called for a change in the policy.

Carried interest income that reflecs a return on invested capital, however,
would continue to be taxed at the capital gains rate.

When carried interest does not reflect such a return on invested capital,
the bill would require investment fund managers to treat 75 percent of that
interest income as ordinary income. The other 25 percent would be taxed at
the lower capital gains rate.

On the Medicare issue, a summary released by Levin and Baucus indicates
physicians will not see the cuts in their payments and will instead receive
"reasonable updates" to rates for the rest of 2010 and in 2011.

In 2012 and 2013, rates would continue to grow if spending growth is "within
reasonable limits."

Extra money would be set aside for primary care and preventive care, which
were priorities in the new healthcare law.

The Senate and House hope to move the package before leaving Washington for
the Memorial Day recess, as some spending measures in the package, such as
unemployment benefits, will soon expire without an extension.

Here's the summary of the carried interest portion of the plan:

"The bill would prevent investment fund managers from paying taxes at
capital gains rates on investment management services income received as
carried interest in an investment fund. To the extent that carried interest
reflects a return on invested capital, the bill would continue to tax
carried interest at capital gain tax rates. However, to the extent that
carried interest does not reflect a return on invested capital, the bill
would require investment fund managers to treat seventy-five percent (75%)
of the remaining carried interest as ordinary income. A transition rule
would apply prior to January 1, 2013. This proposal is currently being
estimated by the Joint Committee on Taxation.”

A summary of the provisions can be found at:
http://waysandmeans.house.gov/press/PRArticle.aspx?NewsID=11191

*Julian Pecquet contributed to this story.*

*This story was posted at 9:40 a.m. and updated at 10:50 a.m.*
--
Eric D. Schwerin
Rosemont Seneca Partners
(202) 333-1880
eschwerin@rosemontseneca.co