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TAX NEWS - 2010

N.Y. Hedge Fund Tax Re-Ignites Conn. Rivalry

It seems that the plan by Gov. David A. Paterson and New York's legislative leaders to tax out-of-state hedge fund managers may have ignited something of a dispute with Connecticut, another stronghold of the industry.

On Wednesday, Connecticut's governor, M. Jodi Rell, sent a letter to the president of the New York Hedge Fund Roundtable, Timothy Selby, offering her state's services to hedge fund managers who relocate, The Associated Press reported.

In the letter, Ms. Rell invited Mr. Selby and other managers to make Connecticut their new home, the news service reported:

She told Selby that state economic development professionals will help find offices, homes and schools. Rell also praised what she called Connecticut's more enlightened approach to job creation.

Struggling with a gaping budget shortfall, Mr. Paterson and the lawmakers have tabled a plan to enact a tax change that will treat much of the compensation earned by the fund managers who work in New York, but live outside the state, as ordinary income.

Industry observers say the move could open fund managers to double taxation and take some of the shine off New York as a hedge fund destination — a view that Mayor Michael R. Bloomberg of New York appeared to agree with.

The New York Observer reported that Mr. Bloomberg, asked about the new plan, responded: "I think it's the best thing that ever happened to Connecticut. I can't imagine why every hedge fund won't pick up tomorrow and leave."

Many fund managers are paid a flat management fee of 2 percent of assets, plus — as a performance incentive — as much as 20 percent of any profits they generate. The latter amount, known as "carried interest" or "the carry," has been taxed federally at a rate of 15 percent because it is treated as a capital gain, rather than as ordinary income, which is subject to rates as high as 35 percent.

Democratic leaders in Congress have tried three times this year to reclassify that compensation as ordinary income. They have failed each time.

In New York, by contrast, lawmakers over the weekend embraced a proposal by Mr. Paterson to begin taxing nonresident fund managers' carried interest, which they hope will raise about $50 million a year for the state's budget.

But tax lawyers and representatives of investment firms argue that the fund managers could wind up being taxed twice on the same earnings, and warn that those who already live in places like Greenwich, Conn., or Summit, N.J., could decide to move their businesses out of New York and work closer to home.
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