Meet your new thread, same as the old thread.

[taxwonk]

Originally posted by Cletus Miller
Is that true? Passive investors get to deduct investment costs from OI rather than capital gains?

It depends. Some of the costs have to be allocated to the cost of acquiring the asset, which is capital. But the biggest chunk of money is from the tax-exempts, so they don['t deduct it at all. Of course, they also don't pay any tax on their income or gains.

[Greedy,Greedy,Greedy]

Originally posted by taxwonk
You're forgetting about employment taxes and the fact that a huge chunk of the money in the funds is tax-exempt.

See about 2/3 of the way through for exempt orgs - you're gonna figure a way to specially allocate those deductions, aren't you?

If this is really all about 1.5%, there's gotta be a better way.

Think you can figure out a way to give an interest in a start up entity to Manager cap fund cheap, because nothing is in start up entity, then enter into a 2% management fee deal with Manager employment corp, which of course is wholly separate, and then layer a preferred interest that takes 80% on top of that cheap start-up equity?

I have faith that you can structure around this one. Maybe there's some tax revenue while you figure it out.

[ltl/fb]

Originally posted by SlaveNoMore
The comic book collection.

And his collection of bobbleheads from the '93 Phillies.

Ooooh. Minimalism.

[taxwonk]

Originally posted by Greedy,Greedy,Greedy
Wait. You meant there's no difference between having a flow through interest in a partnership and having an equity interest in a corporation?

No.

And last time I checked, my guys took their restricted stock into income based on its current value and all the gain was... well... gain.

What your guys are doing is recognizing income based upon the diffference between what they pay for the stock and its value at the time it vests, unless they were able to make a section 83(b) election to take it into income earlier.

Also, are you suggesting that when they have both a carried interest and an investment interest (because in my deals they always do), that they have two separate interests in the partnership, not a single unified interest?

Yes. For one thing, they need to track their capital accounts separately. They also need to mainatina different interests to account for the flow of funds through the waterfall.

So on the issue of the aggregate versus entity approaches to partnerships, are you going to advocate a consistent entity approach - just like corporations?

When it comes to compensatory interests, fuck yeah.

etft -- t.s.

[taxwonk]

Originally posted by Greedy,Greedy,Greedy
Ah, so you admit you're wrong about them putting money in?

I wasn't wrong. They don't put in any money for the carried interest. That's why they call it "carried."

[Greedy,Greedy,Greedy]

Originally posted by taxwonk
What your guys are doing is recognizing income based upon the diffference between what they pay for the stock and its value at the time it vests, unless they were able to make a section 83(b) election to take it into income earlier.

Has anyone in a start-up ever not filed an 83(b) election?

I mean, anyone who didn't subsequently sue their lawyer or accountant?

[Greedy,Greedy,Greedy]

Originally posted by taxwonk
I wasn't wrong. They don't put in any money for the carried interest. That's why they call it "carried."

Hmmm. Yet, the investors always want to see that the money is in, and may even condition their investment on it - could the two, perhaps, be, uh, related?

[taxwonk]

Originally posted by Greedy,Greedy,Greedy
See about 2/3 of the way through for exempt orgs - you're gonna figure a way to specially allocate those deductions, aren't you?

If this is really all about 1.5%, there's gotta be a better way.

Think you can figure out a way to give an interest in a start up entity to Manager cap fund cheap, because nothing is in start up entity, then enter into a 2% management fee deal with Manager employment corp, which of course is wholly separate, and then layer a preferred interest that takes 80% on top of that cheap start-up equity?

I have faith that you can structure around this one. Maybe there's some tax revenue while you figure it out.

Please clarify what you're saying here. I don't understand your meaning.

[taxwonk]

Originally posted by Greedy,Greedy,Greedy
Has anyone in a start-up ever not filed an 83(b) election?

I mean, anyone who didn't subsequently sue their lawyer or accountant?

Anybody who got NSOs or SARs, for which an 83(b) election is unavailable.

[taxwonk]

Originally posted by Greedy,Greedy,Greedy
Hmmm. Yet, the investors always want to see that the money is in, and may even condition their investment on it - could the two, perhaps, be, uh, related?

No. Actually, the 1% is there more for the fact that a GP has to be a partner from the outset. A carried interest is not a partnership interest at the outset, because it is not a capital investment in the venture.

[Greedy,Greedy,Greedy]

Originally posted by taxwonk
Please clarify what you're saying here. I don't understand your meaning.

I'm just saying this may change the way deals are structured, but they will get to the same place at the end of the day.

Because, at the end of the day, if you invest $10 million into a company and get a $50 million return, there is $40 million of gain.

[Greedy,Greedy,Greedy]

Originally posted by taxwonk
Anybody who got NSOs or SARs, for which an 83(b) election is unavailable.

You're dealing with a different world, and I was responding on restricted stock. The post in question was :

And last time I checked, my guys took their restricted stock into income based on its current value and all the gain was... well... gain.

The point is, there are service providers in corporations who realize capital gains on their return, even if their initial interest was received in connection with services. The VCs are in a similar position on the carried interest - isn't the right compensatory value the value on day 1, before a dime has been earned? After that, they are just getting a piece of the gain.

[taxwonk]

Originally posted by Greedy,Greedy,Greedy
I'm just saying this may change the way deals are structured, but they will get to the same place at the end of the day.

Because, at the end of the day, if you invest $10 million into a company and get a $50 million return, there is $40 million of gain.

True. And the boys and girls getting paid $8 million of that gain will be taxed on their share with a W-2, the same way everybody else who earns compensation for services is.

[Greedy,Greedy,Greedy]

Oops - belongs i post above.

[sgtclub]

Originally posted by taxwonk
When you're talking about a $250 million fund, that "expenses" notion becomes downright funny.

Somewhat, but the expenses for funds is not static. It takes more to run a bigger fund.