The attached two links identify “carried interest” as being
used by Fund Managers to convert compensation for management fees into capital
gain. The Fund Managers are paying 15%
capital gain rates instead of the 35% rate for ordinary income (management
frees).
Congress codified the “economic substance” doctrine in Code
Section 7701(o) in 20101.
Under section 7701(o), the partnerships structured to
artificially convert ordinary income compensation for services should be
disregarded because their only economic purpose is to get the 15% tax rate
instead of the 35% tax rate. The result
is that billions of dollars are not subject to taxation. The 20% shortfall (35% less 15%) is not being
currently taxed. It should be taxed under the plain language of section
7701(o).
I have issued a press release on a related tax issue.
Substance - Not Form - Controls Taxation
The Supreme Court of the United
States has consistently stated that the substance rather than the form of a
transaction is controlling for tax purposes.
Gregory v. Helvering, 293 U.S. 465 (1935), XIV-1 C.B.
193; and Helvering v. Clifford,
309 U.S. 331 (1940), 1940-1 C.B. 105 - The court determined abusive trust
arrangements may be viewed as sham transactions, and the IRS may ignore the
trust and its transactions for federal tax purposes.
Markosian v. Commissioner, 73 T.C. 1235 (1980) - Held that
the trust was a sham because the parties did not comply with the terms of the
trust, and the supporting documents and the relationship of the grantors to the
property transferred did not differ in any material aspect after the creation
of the trust.
Zmuda v. Commissioner, 731 F.2d 1417 (9th Cir. 1984) -
The income and assets of the business trust, the equipment in the equipment
trust, the residence in the family residence trust, and the assets in the
foreign trust were all determined to belong directly to the owner.
Lucas v. Earl, 281 U.S. 111 (1930) - Stated an assignment
of income does not shift the incidence of taxation - the income remains taxable
to the one who actually earned it.
The Supreme Court of the United
States has consistently stated that the substance rather than the form of a
transaction is controlling for tax purposes.
Gregory v. Helvering, 293 U.S. 465 (1935), XIV-1 C.B.
193; and Helvering v. Clifford,
309 U.S. 331 (1940), 1940-1 C.B. 105 - The court determined abusive trust
arrangements may be viewed as sham transactions, and the IRS may ignore the
trust and its transactions for federal tax purposes.
Markosian v. Commissioner, 73 T.C. 1235 (1980) - Held that
the trust was a sham because the parties did not comply with the terms of the
trust, and the supporting documents and the relationship of the grantors to the
property transferred did not differ in any material aspect after the creation
of the trust.
Zmuda v. Commissioner, 731 F.2d 1417 (9th Cir. 1984) -
The income and assets of the business trust, the equipment in the equipment
trust, the residence in the family residence trust, and the assets in the
foreign trust were all determined to belong directly to the owner.
Lucas v. Earl, 281 U.S. 111 (1930) - Stated an assignment
of income does not shift the incidence of taxation - the income remains taxable
to the one who actually earned it.
Section 7701(o) clearly applies to stop the fraudulent filings by
Fund Managers for artificial “carried interest.” In each instance, the “economic substance” is
that the Fund Manager have no business purpose to form partnerships with no
business purpose other than to fraudulently manufacture a capital gain.
That fraudulent practice can easily be stopped under the plain
language of sectin 7701(o) of the IRS Code.
www.irstaxattorney.com (212) 588-1113 ab@irstaxattorney.com
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