Enterprise Value Tax Proposal
As the United States government has increasingly searched for needed revenues, and some members of Congress have called for higher taxes on hedge fund managers and various other new tax proposals have been suggested. One such proposal is the “Enterprise Value Tax”, which passed in the House of Representatives in 2010 (as part of “H.R. 4213, the “American Jobs and Closing Tax Loopholes Act”), and was included in the “American Jobs Act” of 2011, recently submitted to Congress late last year.
While there has been various demands for Congress to address the “carried interest” tax advantages that private-equity, venture-capital, and certain hedge fund managers enjoy, the proposed Enterprise Value Tax (EVT) takes a slightly different form. While some have argued that such a tax is necessary for raising revenues, critics have objected that the proposal leads to onerous taxes that will impede investment and entrepreneurship.
Under the EVT (proposed IRC Section 710), investment management partnerships (such as private equity, venture capital, hedge fund firms, or certain real estate investment groups) would be taxed at ordinary income rates, rather than at capital gains rates, for the net proceeds from sales of “investment services partnership interest”. In general, an investment services partnership interest is defined to be any interest (direct or indirect) in an investment partnership, acquired or held by a person who in the conduct of an active trade or business provides a substantial quantity certain services (such as managing, purchasing, selling, and advising, among others) related to “specified assets” held by the partnership. Specified assets include items such as partnership interests, securities and real estate holdings.
In other words, unlike the standard capital gains tax rates applicable to almost all other sales of assets of a business, under the EVT, sales by partnerships targeted by this proposal would be taxed at ordinary income rates.
Will the EVT, or some variation of it, eventually be part of the Internal Revenue Code? Only time will tell. But anyone subject to these new requirements may want be on the alert for that possibility.