Mary, quite contrary

In working as a lobbyist for the National Venture Capital Association, Mary Kuusisto says she kept seeing a certain study in the hands of congressional aides. “Two and Twenty: Taxing Partnership Profits in Private Equity Funds,” written by University of Illinois School of Law faculty member Victor Fleischer, has been used by proponents of increasing the tax on carried interest in the US. The study has been widely circulated on Capitol Hill.
Kuusisto, a tax partner at law firm Proskauer Rose, decided to create a similarly scholarly document that would act as a rebuttal to Fleischer’s work and, she hoped, would place carried interest taxation in a context that would help lawmakers see its value, thereby keeping its rate in line with long-term capital gains.
The result, “Beyond Two and Twenty,” was rushed to completion just as the two members of the US House of Representatives introduced legislation that would tax carried interest as ordinary income, which is taxed as high as 35 percent, as opposed to the 15 percent currently enjoyed by receivers of carry.
The otherwise highly technical, 33-page document begins by claiming that the Fleischer article “confuses rather than illuminates tax policy” regarding carried interest. It also argues that much of the interest in the subject is due to recent “sensationalism” surrounding private equity and the wealth it has created for some fund managers.
Kuusisto spends some time addressing the mechanics of how interests in carried interest are currently granted and taxed. Of greatest interest to GPs will be her section headed “Sound Tax Policy Should Encourage and Reward Entrepreneurial Risk,” where Kuusisto argues that carried interest or “compensatory partnership interests” are similar to other forms of equity compensation.
While much of the capital put at risk by private equity GPs are from their LPs, Kuusisto argues that US tax policy should take seriously the investment of “human capital” in an endeavor, i.e. sweat equity. “To deny [long-term capital gain rate] treatment to human capital. . .would encourage workers to strip profits out of their businesses in the form of guaranteed non-profit-based salaries rather than build capital value in those same companies,” she concludes. If private equity lobbyists spot congressional aides carrying copies of Kuusisto’s paper under their arms, they’ll have greater reason for hope.