Minimum Wage: Part II

Off Topic Politics & World Issues
81

[quote]countingbeans wrote:

[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?[/quote]

A pre-determined ROI?

Edit:

Are you driving at the fact that the fee is earned on an investment, therefore it’s character should remain a cap gain?

82

This is how I see it (which is probably wrong, lol)

Investment yields $10MM in earnings, which trips a 20% performance fee collected by ABC.
$8MM is left to the investors (USM being one of them) and each investor get’s their cut.

It’s the $2MM in fees I don’t understand.
ABC get’s the $2MM, do they distribute it however they want, keep it, etc…? If USM get’s a portion of that why is it a cap gain and not a bonus/salary.

Basically I don’t understand how it’s tied to his investment as opposed to his work.

83

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[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?[/quote]

A pre-determined ROI?[/quote]

But it’s not a FEE. They actually get paid a fee for managing and usually it’s either flat or a percentage of the amount of the fund being managed.

The “performance fee” you refer to is simply dividing up the spoils in a different way. You can almost think about it like a gift from the other investors that, instead of the other investors paying taxes on, the partners of Fund X GP, LP pay on instead.

84

[quote]usmccds423 wrote:

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?[/quote]

You are good, up until the end.

The “fee” (isn’t a word I would use to describe it) is in increase in share of gains. So, if the FUND missed it’s target ROI, USM gets 5% of 1%. However if the FUND hits its target the 1% turns into 11%.

The only thing that happens different is the share of income increases, the actual flow of income (phantom or not) doesn’t change, just the $ amount. So if 10 dollars is cap gain why isn’t 100?

Suppose there was no carry, and the terms of the partnership agreement read as:

Profit sharing is: 89% to the limited partners, 11% to the general partner (USM)

Loss sharing is: 99% to the limited partners, 1% to the general partner

Cash distributions based on first on committed capital, and indemnification for taxable amounts over previous distributions after years 3, 6, 9 & 10.

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?

[/quote]

85

[quote]usmccds423 wrote:

Are you driving at the fact that the fee is earned on an investment, therefore it’s character should remain a cap gain?[/quote]

I’m driving at:

If the fee is paid as additional investment income it should keep original character.

If the fee is paid, but NOT as additional investment income (IE an expense of the fund) then it is Ordinary.

86

[quote]usmccds423 wrote:
This is how I see it (which is probably wrong, lol)

Investment yields $10MM in earnings, which trips a 20% performance fee collected by ABC.
$8MM is left to the investors (USM being one of them) and each investor get’s their cut.

It’s the $2MM in fees I don’t understand.
ABC get’s the $2MM, do they distribute it however they want, keep it, etc…? If USM get’s a portion of that why is it a cap gain and not a bonus/salary.

[/quote]

USM’s portion of that 2m, would be taxable at Ordinary Rates under current rules.

However, that isn’t how the fees are handled, because of the fact that would be OI. lol

87

[quote]ZJStrope wrote:

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[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?[/quote]

A pre-determined ROI?[/quote]

But it’s not a FEE. They actually get paid a fee for managing and usually it’s either flat or a percentage of the amount of the fund being managed.

The “performance fee” you refer to is simply dividing up the spoils in a different way. You can almost think about it like a gift from the other investors that, instead of the other investors paying taxes on, the partners of Fund X GP, LP pay on instead.
[/quote]

I mean, I’m inexperienced especially on this topic, but it sure seems like a fee to me. Those other investors are awful nice to give such a gift!

88

[quote]usmccds423 wrote:
This is how I see it (which is probably wrong, lol)

Investment yields $10MM in earnings, which trips a 20% performance fee collected by ABC.
$8MM is left to the investors (USM being one of them) and each investor get’s their cut.

It’s the $2MM in fees I don’t understand.
ABC get’s the $2MM, do they distribute it however they want, keep it, etc…? If USM get’s a portion of that why is it a cap gain and not a bonus/salary.

Basically I don’t understand how it’s tied to his investment as opposed to his work. [/quote]

The 20% you refer to is collected by the Fund X GP, LP NOT ABC LLC.

ABC LLC is the General Partner of Fund X GP, LP while USM is a Limited Partner.

So Fund X GP, LP as a whole (which is made up of ABC LLC as the General partner and the employees including USM as Limited Partners), is allocated more of the investment income based on an agreement amongst all investors of Fund X. Remember Fund X GP, LP and Outside Investors are all Investors.

89

[quote]usmccds423 wrote:

I mean, I’m inexperienced especially on this topic, but it sure seems like a fee to me. Those other investors are awful nice to give such a gift! [/quote]

Haha. I know. So we go back to the argument: Intent vs Letter of the Law.

It’s funny b/c GAAP follows intent most of the time. Tax law not so much.

90

[quote]countingbeans wrote:

[quote]usmccds423 wrote:
This is how I see it (which is probably wrong, lol)

Investment yields $10MM in earnings, which trips a 20% performance fee collected by ABC.
$8MM is left to the investors (USM being one of them) and each investor get’s their cut.

It’s the $2MM in fees I don’t understand.
ABC get’s the $2MM, do they distribute it however they want, keep it, etc…? If USM get’s a portion of that why is it a cap gain and not a bonus/salary.

[/quote]

USM’s portion of that 2m, would be taxable at Ordinary Rates under current rules.

However, that isn’t how the fees are handled, because of the fact that would be OI. lol[/quote]

Okay, I think I’ve got it.

So, basically, the way it was working in my head would have made it OI, but unfortunately for my brain it isn’t handled that way. It is instead handled as a distribution of investment income, just like before, it’s just more.

91

[quote]ZJStrope wrote:

[quote]usmccds423 wrote:

I mean, I’m inexperienced especially on this topic, but it sure seems like a fee to me. Those other investors are awful nice to give such a gift! [/quote]

Haha. I know. So we go back to the argument: Intent vs Letter of the Law.

It’s funny b/c GAAP follows intent most of the time. Tax law not so much.[/quote]

Lol, probably why I prefer GAAP.

92

[quote]usmccds423 wrote:

[quote]ZJStrope wrote:

[quote]usmccds423 wrote:

I mean, I’m inexperienced especially on this topic, but it sure seems like a fee to me. Those other investors are awful nice to give such a gift! [/quote]

Haha. I know. So we go back to the argument: Intent vs Letter of the Law.

It’s funny b/c GAAP follows intent most of the time. Tax law not so much.[/quote]

Lol, probably why I prefer GAAP.[/quote]

Yeah, but even GAAP is open to interpretation and professional opinion. :slight_smile: I can’t complain about how complicated it is. It’s why I get paid as much as I do.

93

[quote]ZJStrope wrote:

[quote]usmccds423 wrote:

[quote]ZJStrope wrote:

[quote]usmccds423 wrote:

I mean, I’m inexperienced especially on this topic, but it sure seems like a fee to me. Those other investors are awful nice to give such a gift! [/quote]

Haha. I know. So we go back to the argument: Intent vs Letter of the Law.

It’s funny b/c GAAP follows intent most of the time. Tax law not so much.[/quote]

Lol, probably why I prefer GAAP.[/quote]

Yeah, but even GAAP is open to interpretation and professional opinion. :slight_smile: I can’t complain about how complicated it is. It’s why I get paid as much as I do.[/quote]

True enough. I spent a semester about a year ago comparing IFRS to U.S. GAAP, talk about a headache…

94

[quote]usmccds423 wrote:

[quote]countingbeans wrote:

[quote]usmccds423 wrote:
This is how I see it (which is probably wrong, lol)

Investment yields $10MM in earnings, which trips a 20% performance fee collected by ABC.
$8MM is left to the investors (USM being one of them) and each investor get’s their cut.

It’s the $2MM in fees I don’t understand.
ABC get’s the $2MM, do they distribute it however they want, keep it, etc…? If USM get’s a portion of that why is it a cap gain and not a bonus/salary.

[/quote]

USM’s portion of that 2m, would be taxable at Ordinary Rates under current rules.

However, that isn’t how the fees are handled, because of the fact that would be OI. lol[/quote]

Okay, I think I’ve got it.

So, basically, the way it was working in my head would have made it OI, but unfortunately for my brain it isn’t handled that way. It is instead handled as a distribution of investment income, just like before, it’s just more. [/quote]

For the most part, you are correct here.

And that is the basis for your argument. As has been mentioned, The INTENT of the payment is to reward the manager for a job well done, however by rule of law, the payment is handled in a way that makes the original character of the income the taxable character.

And, like I alluded to, once you start changing the character here, a whole bunch of other investments start becoming subject to this “test” and will fail, miserably if this one does.

95

[quote]usmccds423 wrote:

[quote]ZJStrope wrote:

[quote]usmccds423 wrote:

[quote]ZJStrope wrote:

[quote]usmccds423 wrote:

I mean, I’m inexperienced especially on this topic, but it sure seems like a fee to me. Those other investors are awful nice to give such a gift! [/quote]

Haha. I know. So we go back to the argument: Intent vs Letter of the Law.

It’s funny b/c GAAP follows intent most of the time. Tax law not so much.[/quote]

Lol, probably why I prefer GAAP.[/quote]

Yeah, but even GAAP is open to interpretation and professional opinion. :slight_smile: I can’t complain about how complicated it is. It’s why I get paid as much as I do.[/quote]

True enough. I spent a semester about a year ago comparing IFRS to U.S. GAAP, talk about a headache…[/quote]

IFRS is basically GAAP 100 years ago.

96

[quote]countingbeans wrote:

[quote]usmccds423 wrote:

[quote]ZJStrope wrote:

[quote]usmccds423 wrote:

[quote]ZJStrope wrote:

[quote]usmccds423 wrote:

I mean, I’m inexperienced especially on this topic, but it sure seems like a fee to me. Those other investors are awful nice to give such a gift! [/quote]

Haha. I know. So we go back to the argument: Intent vs Letter of the Law.

It’s funny b/c GAAP follows intent most of the time. Tax law not so much.[/quote]

Lol, probably why I prefer GAAP.[/quote]

Yeah, but even GAAP is open to interpretation and professional opinion. :slight_smile: I can’t complain about how complicated it is. It’s why I get paid as much as I do.[/quote]

True enough. I spent a semester about a year ago comparing IFRS to U.S. GAAP, talk about a headache…[/quote]

IFRS is basically GAAP 100 years ago. [/quote]

That’s what I took away from the course…

97

Did we just have a 2 page accounting geek-out here? I think we did. That was by far one of the most interesting tangent discussions I’ve seen here in PWI. I just learned a lot…and I love it! haha

98

[quote]Aragorn wrote:
Did we just have a 2 page accounting geek-out here? I think we did. That was by far one of the most interesting tangent discussions I’ve seen here in PWI. I just learned a lot…and I love it! haha[/quote]

Ha!

Not only that, but I (we) actually learned something. PWI must be malfunctioning…

99

[quote]Aragorn wrote:
Did we just have a 2 page accounting geek-out here? I think we did. That was by far one of the most interesting tangent discussions I’ve seen here in PWI. I just learned a lot…and I love it! haha[/quote]

Nice, thanks.

I can go on and on about other nerd topics too, just let me know.

100

[quote]H factor wrote:
Also I think the growing income inequality right now is a big concern, but I bet we have diametrically opposed reasons for why it is a concern Pitt. [/quote]

enter Feudalism