On the June 21 edition of National Public Radio's (NPR) Morning Edition, host Steve Inskeep introduced a report on a bill to change the tax structure for certain private-equity firms that buy out other companies by saying the measure "may count as one way Congress is thinking about soaking the rich." By contrast, proponents of the bill have cast it as closing a loophole.
The bill "would tax as corporations all publicly traded partnerships whose profit comes from managing other people's assets" while giving firms that have already gone public or filed to do so a five-year exemption from the new rules, the Associated Press reported June 19.
Inskeep used the charged language -- "soaking the rich" -- while leaving out the fact that the bill's lead cosponsors are the senior Democrat and Republican on the Senate Finance Committee, as well as their reasoning in introducing the bill. Sens. Max Baucus (D-MT) and Charles Grassley (R-IA) have argued that allowing private-equity firms to treat their income as "passive" is a loophole inconsistent with the intent of existing law.
In a floor statement, Grassley accused the firms of "structuring service fees in a way that purports to characterize those fees as passive-type income." The IRS defines as "passive activity" any "[t]rade or business activities in which you do not materially participate during the year "or "[r]ental activities... unless you are a real estate professional."
As Baucus noted, under the current law, publicly traded partnerships "that receive 90 percent or more of their income from passive income" are not treated as a corporation for tax purposes. Baucus stated that "[p]assive income includes dividends, rents, royalties, interest, and the sale of capital gains."
Regarding the firms' attempts to define their income source as passive, Baucus said: "[O]bjective observers would say that this income actually arises from active businesses. Congress' intent in 1987 was to treat such publicly traded partnerships as corporations." Discussing the firms' structuring of their income in order to be labeled passive, Grassley stated, "Whether or not these structures comply with the letter of the law, they are inconsistent with the purposes of the publicly traded partnership rules."
From the June 21 edition of NPR's Morning Edition:
INSKEEP: Two key senators surprised Wall Street last week with a plan to increase taxes on a particular kind of private equity firm. It's a tax that would only apply to a couple of companies, very wealthy ones, and so this may count as one way that Congress is thinking about soaking the rich. David Wessel, deputy Washington bureau chief of The Wall Street Journal, has been thinking about this story, and David, welcome to the program once again.
WESSEL: Good morning.
INSKEEP: So we're talking about private equity firms. Wealthy investors pool their money. They go buy a company. The company gets turned around. It gets sold again. That's the normal pattern, but what are these two companies that would be affected by this tax?
WESSEL: The two companies that would be affected by this tax that Senator [Max] Baucus [D-MT] and Senator [Chuck] Grassley [R-IA] are pushing for are companies that are private equity companies, but are now trying to become public -- that is, sell shares to the public. One is already public: Fortress. The other big one, which wants to go public, is called Blackstone. All companies, Wall Street companies that is, don't like paying taxes. These companies have found a couple of ways to avoid paying the taxes that other companies pay. One is, they want to be treated like partnerships rather than corporations and avoid the corporate profits tax, and that's what Mr. Grassley and Mr. Baucus are trying to do away with in this bill.
INSKEEP: Those are the two senators we were talking about.
WESSEL: The two senators, right. The leading Democrat and Republican on the Senate Finance Committee. The other thing that's in play is these private equity firms have found a way to take some of their income and tax it as capital gains, which is taxed at a much lower rate than the ordinary wage income that most of us make, and that's also in play.