Minimum Wage: Part II

Off Topic Politics & World Issues
61

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[quote]usmccds423 wrote:

Right, but how is any of that USM’s? Aren’t the original investors the ones with the gains? [/quote]

Yes, but USM is an investor in the FUND X GP. Which is the general partner of the fund the other investors are limited partners of. [/quote]

So the 1% of the 5% is not from the $1B? It’s his own personal investment? [/quote]

Yes it is from the 1b, and yes it is still his own personal investment. His personal investment is 500k. (The 5% of the 1%) His personal investment just happens at a different tier than the others.

Let’s say all the investors USM brings in are pension plans.

The Pension Plan will invest 990,000,000 in FUND X. They will then become limited partners. Well, FUND X still needs a general partner.

So USM and 19 of his co-workers get together and each pool 500k, with ABC LLC putting in 500k. This 10m (20*500k) is then used to create FUND X GP.

FUND X GP then joins Pension Plan and invests its 10m in FUND X, which is now a 1b fund. (990m + 10m).

FUND X is a partnership, so any gains on that 1b is passed through to the partners. FUND X GP getting 1% of those gains (1b/10m).

USM then gets 5% of those gains because he invested 500k in FUND X GP.

62

[quote]usmccds423 wrote:
Also, for my sanity, we aren’t talking about performance fees assessed on the gains?
[/quote]

We are, basically, yes talking about that. Except I didn’t run the math on the carry.

63

[quote]countingbeans wrote:

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[quote]usmccds423 wrote:

Right, but how is any of that USM’s? Aren’t the original investors the ones with the gains? [/quote]

Yes, but USM is an investor in the FUND X GP. Which is the general partner of the fund the other investors are limited partners of. [/quote]

So the 1% of the 5% is not from the $1B? It’s his own personal investment? [/quote]

Yes it is from the 1b, and yes it is still his own personal investment. His personal investment is 500k. (The 5% of the 1%) His personal investment just happens at a different tier than the others.

Let’s say all the investors USM brings in are pension plans.

The Pension Plan will invest 990,000,000 in FUND X. They will then become limited partners. Well, FUND X still needs a general partner.

So USM and 19 of his co-workers get together and each pool 500k, with ABC LLC putting in 500k. This 10m (20*500k) is then used to create FUND X GP.

FUND X GP then joins Pension Plan and invests its 10m in FUND X, which is now a 1b fund. (990m + 10m).

FUND X is a partnership, so any gains on that 1b is passed through to the partners. FUND X GP getting 1% of those gains (1b/10m).

USM then gets 5% of those gains because he invested 500k in FUND X GP. [/quote]

Okay, I’m tracking now.

64

[quote]countingbeans wrote:

[quote]usmccds423 wrote:
Also, for my sanity, we aren’t talking about performance fees assessed on the gains?
[/quote]

We are, basically, yes talking about that. Except I didn’t run the math on the carry. [/quote]

This would be in addition to the gain he get’s on his $500k investment though, right?

65

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[quote]usmccds423 wrote:
Also, for my sanity, we aren’t talking about performance fees assessed on the gains?
[/quote]

We are, basically, yes talking about that. Except I didn’t run the math on the carry. [/quote]

This would be in addition to the gain he get’s on his $500k investment though, right? [/quote]

Sort of.

All the carry does is increase the share of the income from FUND X that FUND X GP gets.

So, when a fund hits its carry, or performance benchmark, FUND GP X gets 10% of the income rather than 1%, as a priority return, and then gets 1% of the remaining 90% of returns left.

So, USM would get 5% of 11% rather than 5% of 1% if the top tier fund, FUND X, hits a performance benchmark.

66

713×658 22.5 KB

I tried to do a graphical representation for you Beans.

Let me know if I missed something

67

[quote]countingbeans wrote:

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[quote]usmccds423 wrote:
Also, for my sanity, we aren’t talking about performance fees assessed on the gains?
[/quote]

We are, basically, yes talking about that. Except I didn’t run the math on the carry. [/quote]

This would be in addition to the gain he get’s on his $500k investment though, right? [/quote]

Sort of.

All the carry does is increase the share of the income from FUND X that FUND X GP gets.

So, when a fund hits its carry, or performance benchmark, FUND GP X gets 10% of the income rather than 1%, as a priority return, and then gets 1% of the remaining 90% of returns left.

So, USM would get 5% of 11% rather than 5% of 1% if the top tier fund, FUND X, hits a performance benchmark. [/quote]

That makes sense.

So let me ask you this, why isn’t USM’s portion of the carry gain considered gross income under IRC 61?

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;

It is a fee assessed on services rendered.

68

[quote]ZJStrope wrote:
I tried to do a graphical representation for you Beans.

Let me know if I missed something[/quote]

LMAO!

Good job man. Not too shabby.

I woul dhave laid it out different, but yeah.

69

[quote]countingbeans wrote:

[quote]ZJStrope wrote:
I tried to do a graphical representation for you Beans.

Let me know if I missed something[/quote]

LMAO!

Good job man. Not too shabby.

I woul dhave laid it out different, but yeah. [/quote]

Wouldn’t call it my best work but I had a few minutes and although I know some of the stuff, it’s always good to get a deeper understanding. I appreciate the lessons here.

70

[quote]ZJStrope wrote:
I tried to do a graphical representation for you Beans.

Let me know if I missed something[/quote]

Thanks!

71

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[quote]usmccds423 wrote:
Also, for my sanity, we aren’t talking about performance fees assessed on the gains?
[/quote]

We are, basically, yes talking about that. Except I didn’t run the math on the carry. [/quote]

This would be in addition to the gain he get’s on his $500k investment though, right? [/quote]

Sort of.

All the carry does is increase the share of the income from FUND X that FUND X GP gets.

So, when a fund hits its carry, or performance benchmark, FUND GP X gets 10% of the income rather than 1%, as a priority return, and then gets 1% of the remaining 90% of returns left.

So, USM would get 5% of 11% rather than 5% of 1% if the top tier fund, FUND X, hits a performance benchmark. [/quote]

That makes sense.

So let me ask you this, why isn’t USM’s portion of the carry gain considered gross income under IRC 61?

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;

It is a fee assessed on services rendered.
[/quote]

This is the entire crux of the argument.

It is investment income to him. He invested money, and got a return.

To turn around and call it OI, changes the character of the income, and does so at the second Tier that it is earned.

Let me ask you this: if you direct your own stocks in retirement, and hit a goldmine with Google, should you have to pay OI rates when you cash out to buy your grandkid a new scooter?

72

[quote]countingbeans wrote:

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[quote]usmccds423 wrote:
Also, for my sanity, we aren’t talking about performance fees assessed on the gains?
[/quote]

We are, basically, yes talking about that. Except I didn’t run the math on the carry. [/quote]

This would be in addition to the gain he get’s on his $500k investment though, right? [/quote]

Sort of.

All the carry does is increase the share of the income from FUND X that FUND X GP gets.

So, when a fund hits its carry, or performance benchmark, FUND GP X gets 10% of the income rather than 1%, as a priority return, and then gets 1% of the remaining 90% of returns left.

So, USM would get 5% of 11% rather than 5% of 1% if the top tier fund, FUND X, hits a performance benchmark. [/quote]

That makes sense.

So let me ask you this, why isn’t USM’s portion of the carry gain considered gross income under IRC 61?

(1) Compensation for services, including fees, commissions, fringe benefits, and similar items;

It is a fee assessed on services rendered.
[/quote]

This is the entire crux of the argument.

It is investment income to him. He invested money, and got a return.

To turn around and call it OI, changes the character of the income, and does so at the second Tier that it is earned.

Let me ask you this: if you direct your own stocks in retirement, and hit a goldmine with Google, should you have to pay OI rates when you cash out to buy your grandkid a new scooter?[/quote]

Lol, I would say no, but only because that money was set aside out of my ordinary income for retirement purposes. Had I not put it into my retirement account it would of been taxed at OI.

Why does USM get to keep earnings at the cap gains rate when they are earned through his regular employment (Talking about the carry gain here not the gain on his $500k) when other folks (in different industries) do not get the same treatment?

Why don’t waitresses get to pay tax at cap gains rates on the tips they receive? To me it’s very similar. His job is to be a successful fund manager and his performance fee reflects his job.

Cap gains on the $500k investment I get and agree with. Cap gains on the carry amount I’m not on board with, yet…

I don’t think I’m doing a very good job explaining my thoughts. It’s a lot more clear cut in my head.

73

The reasoning goes is that it’s Investment Income. How that income gets dolled out amongst a group of investors doesn’t matter.

So if you, beans, and I were all to throw in $100k and we earned $100k on that but decided we’d allocate 50% to you and 25% each to Beans and I, it’s still investment income taxed at that nice rate.

The carry doesn’t represent HIS performance. It represents the Fund X GP, LP performance by dividing up the investment income in a different way as I just described in the example with you, Beans and I.

USM get’s paid separately by ABC LLC to run the fund.

74

[quote]usmccds423 wrote:

Lol, I would say no, but only because that money was set aside out of my ordinary income for retirement purposes. Had I not put it into my retirement account it would of been taxed at OI.

Why does USM get to keep earnings at the cap gains rate when they are earned through his regular employment (Talking about the carry gain here not the gain on his $500k) when other folks (in different industries) do not get the same treatment? [/quote]

Because USM took money he had previously earned (and paid taxes on) and invested along with the people that trust him to do well in his investment choices.

He chooses to invest, not forced, not required by his job, no obligation to invest other than faith in his ability.

How is what he does any different than the old man who manages his own retirement savings? (Even assume the old man worked on The Street.)

Because the tip is like the management fees that are taxed at OI rates. The carry is like if that customer shared his dessert with her.

[quote]Cap gains on the $500k investment I get and agree with. Cap gains on the carry amount I’m not on board with, yet…

[/quote]

So why is the additional amount not okay, when the original is? Nothing changed with the underlying activity, the only change was FUND X made a lot fo people, a lot of money.

75

[quote]ZJStrope wrote:
The reasoning goes is that it’s Investment Income. How that income gets dolled out amongst a group of investors doesn’t matter.

So if you, beans, and I were all to throw in $100k and we earned $100k on that but decided we’d allocate 50% to you and 25% each to Beans and I, it’s still investment income taxed at that nice rate.

[/quote]

This.

Although I could answer my questions above this in a certain way that argues USM’s case. lol

This topic is very easy to debate from both sides.

76

[quote]countingbeans wrote:

[quote]ZJStrope wrote:
The reasoning goes is that it’s Investment Income. How that income gets dolled out amongst a group of investors doesn’t matter.

So if you, beans, and I were all to throw in $100k and we earned $100k on that but decided we’d allocate 50% to you and 25% each to Beans and I, it’s still investment income taxed at that nice rate.

[/quote]

This.

Although I could answer my questions above this in a certain way that argues USM’s case. lol

This topic is very easy to debate from both sides. [/quote]

Oh absolutely. You basically have to argue letter of the law OR Intent of the transaction.

77

[quote]ZJStrope wrote:
The reasoning goes is that it’s Investment Income. How that income gets dolled out amongst a group of investors doesn’t matter.

So if you, beans, and I were all to throw in $100k and we earned $100k on that but decided we’d allocate 50% to you and 25% each to Beans and I, it’s still investment income taxed at that nice rate.

The carry doesn’t represent HIS performance. It represents the Fund X GP, LP performance by dividing up the investment income in a different way as I just described in the example with you, Beans and I.

USM get’s paid separately by ABC LLC to run the fund.
[/quote]

But I’m talking about the performance fee only. So that’s like if me, you, and Beans all chipped in $100k and Beans managed the fund. We earn $100k, which Beans get’s 20% of as a performance fee. Then the remaining $ are doled out. Why isn’t that extra 20% considered earned income?

78

I don’t want this to hijack, but I found this article and wanted to share since it related to “taxing the rich.”

The Hollywood Industry is leaving California for more cost-friendly places, so the next time you hear a Hollywood Lib scream about taxing the wealthy, tell him to go choke on his soy milk.

A new report from FilmL.A. provides further evidence that California is rapidly losing its share of big budget feature films to rival states and countries.

The research echoes the findings in a Los Angeles Times report in December that found California?s share of top grossing movies dropped by 60%, from 57 movies wholly or partially shot in the state in 1997 to just 23 in 2012.

?State policymakers have the opportunity to make a difference this year by expanding California?s film and television tax credit. We hope they give the strongest possible signal to the film industry that they want to keep film jobs in California.?

79

[quote]usmccds423 wrote:

[quote]ZJStrope wrote:
The reasoning goes is that it’s Investment Income. How that income gets dolled out amongst a group of investors doesn’t matter.

So if you, beans, and I were all to throw in $100k and we earned $100k on that but decided we’d allocate 50% to you and 25% each to Beans and I, it’s still investment income taxed at that nice rate.

The carry doesn’t represent HIS performance. It represents the Fund X GP, LP performance by dividing up the investment income in a different way as I just described in the example with you, Beans and I.

USM get’s paid separately by ABC LLC to run the fund.
[/quote]

But I’m talking about the performance fee only. So that’s like if me, you, and Beans all chipped in $100k and Beans managed the fund. We earn $100k, which Beans get’s 20% of as a performance fee. Then the remaining $ are doled out. Why isn’t that extra 20% considered earned income?

[/quote]

How is that performance fee determined?

As in, what is the trigger?

80

[quote]countingbeans wrote:
Because USM took money he had previously earned (and paid taxes on) and invested along with the people that trust him to do well in his investment choices. [/quote]

I think this is one area I am confused on. How are the $'s USM get’s, from the performance fee, related to his original $500k investment? Does he only get a portion of the performance fee based on his investment?

Again, I completely get this with the original $500k, but not the additional earnings due tot eh performance fee.

Same as above. It’s the fee I’m stuck on.

I would think her $3.50/hr or whatever is like the management fee and her tip is like the performance fee?

[quote]
So why is the additional amount not okay, when the original is? Nothing changed with the underlying activity, the only change was FUND X made a lot fo people, a lot of money. [/quote]

I guess I still don’t quite understand. So, the fund hits it’s mark (carry) and a fee, let’s say 20%, is charged. A portion of that becomes USM’s. USM’s portion is based on the total gain not his personal gain or his personal investment, correct? That is where I’m confused. The performance fee, the way I’m understanding it, is not a re-investment of his own post-tax money, but essentially a tip or bonus on the overall gain. Am I misunderstanding?