Chasin’ Carry: Assessing the IRS’ § 1061 Proposed Regulations

(Source)   The world of private equity is fascinating. Larger-than-life firms pool immense amounts of capital from individual and institutional investors. Firms organize these pools into funds, secure leverage, and begin investing in, restructuring, and ultimately selling for profit, a variety of assets, like distressed businesses and real estate. In theory, numerous parties stand to share in the spoils. Should they successfully argue their case before the fund, asset owners can raise capital without navigating the burdensome processes of debt financing or issuing public shares. Moreover, the owners and their assets also benefit from the knowledge and management expertise accompanying the private capital. Of course, the fund’s investors stand to gain substantial returns on their investments. And the spoils are plenty: according to Bain and Company’s 2020 Global Private Equity Report, in 2019 total buyout value was $551 billion and total exit value amounted to $405 billion. What do the fund managers gain from all of this? In return for their services, fund managers are assigned interests in the investments’ ultimate profits. These interests are termed “carried interests,” or, more colloquially, “carry.” (The term stems from the practices of medieval merchants in Europe who were issued interests in the profits [read more]

Supporting the Arts is TAXing: The Difficulty of Establishing Effective Arts Funding Schemes in Creative Cities

(Source) In the United States, the arts and culture industries are massive economic engines. In fact, the arts contribute $763.6 billion to the U.S. economy annually, which is more than both the agricultural and transportation industries. Furthermore, the arts drive job growth and promote cultural tourism in cities across the U.S. This data suggests that, across the nation, the arts contribute value to our communities and “play a meaningful role in our daily lives, including through the jobs we have, the products we purchase, and the experiences we share.” Because the arts are so vital to some state economies, it is important to consider the policies and procedures regarding the funding of this sector. Funding for the arts is a complicated matter due to the breadth of subjects, organizations, and fundraising schemes that fall under the umbrella of the “arts.” From the complex Broadway musical industry with many moving parts to an individual artisan jewelry-making business to nonprofit arts education programs, organizations and artists may face very different operating problems and therefore require different funding schemes. As one commentator noted in an article for Americans for the Arts, “Local Arts Agencies are like snowflakes; no two are exactly alike. Each [read more]

New York City Taxation of Corporate REMIC Residual Interest Holders by Mireille Zuckerman

I. Introduction In 2007, the New York Division of Tax Appeals ruled in Delta Financial that the starting point for determining New York State corporate entire net income includes Real Estate Mortgage Investment Conduit (REMIC) excess inclusion.[1] The effect of Delta Financial is that even if a corporation has net losses for a taxable year, REMIC residual interest income remains subject to New York State tax.  This mimics the federal treatment of residual interest income.  Although New York City has not litigated this issue, the reasoning behind Delta Financial also applies to New York City general corporate tax. Although the State published REMIC guidelines in 1988, the 2007 case was the first on this issue.  This is probably because the REMIC excess inclusion provisions have an impact on State and City tax assessment only in years in which a corporation reports a net loss.  After big losses in 2007 and 2008, corporations have been reporting zero taxable income to both the State and the City, even if they have large amounts of REMIC interest income.  New York City should begin pursuing this untaxed income.  This post briefly describes REMICs and the reasoning behind Delta Financial and the City’s decision to [read more]