The Treasury Department and IRS will seek to prevent hedge funds from exploiting the new tax law to cut their taxes through carried interest, Steven Mnuchin said Wednesday in congressional testimony.
Mnuchin was responding to the news reported earlier in the morning by Bloomberg that hedge funds are setting up Delaware LLCs in large numbers to try to avoid the law’s limitation on carried interest.
The administration will send out guidance explaining that “we do believe that taxpayers will not be able to get that loophole,” Mnuchin said. He explained that he’d met with the IRS and his own tax staff regarding the article.
The tax law included a provision meant to prevent hedge funds from earning any carried interest — that is, earnings for partners that are taxed at the lower investment income rate rather than at the higher income tax rates. Under the tax law signed by Trump, assets would have to be held for three years before proceeds from their sale can be treated as carried interest.
For hedge funds that quickly buy and sell stakes in companies, the law would disallow some of the relatively small amount of carried interest they earn. Most carried interest is earned by private equity investors who maintain an interest in companies for longer periods of time.
But the limitation did not mandate the longer holding period for earnings accruing to corporations, rather than individuals. Accordingly, hedge funds are setting up S-Corporations in Delaware to take advantage of the break, according to Bloomberg.
“We will have that resolved,” Mnuchin pledged in questioning with Sen. Ron Wyden, D-Ore.
Under criticism from Wyden, Mnuchin defended the new tax law, saying that the forthcoming guidance wouldn’t be a “fix” to the law, but rather an interpretation of the existing law regarding carried interest.
On the campaign trail, Donald Trump said that he aimed to end the preference for carried interest.
That was still his intent with the tax law, Mnuchin claimed, but Republicans in Congress drafted the legislation not to eliminate carried interest. Instead, they merely lengthened the required holding period.
