There never was any doubt that the “hedge fund guys” Donald Trump railed against in his 2016 campaign and then stocked his administration with would do well out of his great 2017 tax heist “reform,” nor that the carried interest loophole he pretended to oppose would survive. After all, look at the two guys who wrote it.
Now look at them again, and consider the seat-of-the-pants, slapdash way in which they wrote it, and also the way it was passed before anyone actually bothered to read the thing, and it’s equally unsurprising that it’s riddled with errors—like the part where they wrote “athletics” instead of “athletes,” potentially screwing over billionaire team owners instead of the people of color who play games for a living as undoubtedly intended. It’s even less surprising that the rich people who did so well from it think they should have done even better, and even less surprising still that those rich people have teams of tax lawyers seeking the wring every potential loophole and advantage for all that it’s worth.
And so, the law as written allows hedge fund managers to keep paying the capital-gains rate on carried interest—as long as they wait three years. But that’s such a long time and such a pain in the ass. Luckily, the law also says, thanks apparently to some typically shoddy drafting, that corporations are exempt from that onerous delay and can have their carried interest after just one year. Now, it doesn’t take even a particularly sharp or gifted lawyer to figure out what comes next.
Hedge funds found a way to use that exemption by setting up S corporations and limited liability companies for managers entitled to share carried-interest payouts, allowing them to be eligible for the lower rates more quickly.
For all we know, this is exactly as Steve Mnuchin intended, and for two years it worked. But it’s an election year and Mnuchin’s boss is losing badly, and so the word appears to have come in from next door that some administrative-law populism is in order.
The change, published Friday, bars money managers from using some types of business entities, including S corporations and passive foreign investment companies, to take advantage of an exemption to rules for taxing carried interest…. The regulations are politically sensitive. President Donald Trump, before the 2017 tax law, vowed to end the tax break. The overhaul ultimately scaled back the benefits for carried interest, rather than repealing them entirely.
Sounds bad, but luckily for those hedge fund managers (and their lawyers) they can no doubt count on another Trump appointee, Neil Gorsuch, reminding Joe Biden’s Treasury Secretary that “only the written word is the law.”
Some experts question whether the IRS has the authority to put this restriction in place, given that the tax law doesn’t include a limitation on the type of corporations that can access the tax break. A U.S. Court of Appeals ruling suggested the same.