Capital Gains Tax On Earned Income: Contrived Form vs. Substance

ROMNEY ‘S LIE ON 60 MINUTES ABOUT WHY HIS “INCOME” IS TAXED AS CAPITAL GAINS: “Corporations are already taxed at 35%!” Soooooooooo.

The 35% rate is after all corporate deductions, after all business expenses, including deductions for having paid out earned income which is taxed to the recipient. Savings from taxed income are then invested to produce unearned income from returns on investments – which, if held long enough, are taxed at a capital gain rate when the asset is sold and profits are taken. If there are loses, then the loss becomes a deduction for the individual.

Romney has not been called out about the “carried interest” capital gain taxable rate on income which formerly only applied to Hedge Funds — this is a “loophole,” a specific special provision for the ultra rich that Romney could eliminate, as he wants to “eliminate loopholes.” (Which Congress should have already done.)

Fifteen years ago a Hedge Fund was simply a fund that could invest in stocks or currency in any market in any position – ie., long or short – like an individual investor could. Not a venture capital company investing in startups or cannibalizing and leveraging existing companies as Bain, and others, did and continue to do – leaving the companies behind drowing in a sea of debt after throwing as many employees away as possible to keep the sinking ship afloat.  Bain took out large dividends as well as large management fees – does the substance of this not constitute earned income?

Should capital gains treatment of earned income for management ever have applied to Hedge Funds? And how did so many “venture capital companies” become hedge funds with all management income, all earned income for managers, treated as capital gains based on the “carried interest” lie?

This bogus tax treatment is not just indigenous to Republicans, so Democrats need to understand this as well as, and stop this specific favoritism for the ultra rich.  Fine tax attorneys understand subverting substance and great IRS agents (with the right mandate) could put an end to this! Years ago the IRS always attempted — to see through form contrived to get around the substance and intent of the tax code. The first 40 or so pages of the TAX CODE delineate the substance and intent of what constitutes the substance of income. The other stuff, thousands of additional pages, are regulations which interpret the code and how it should and does apply to specific situations. However, the code is what controls any interpretation of income or form designed to get around the substance.

The first 40 or so pages of the code characterize what constitutes income. From 45 years of thinking tax as it relates to real estate securities, succession planning and business consulting; and basing recommendations and advice on the substance of the code to avoid all the contrived forms designed to get around code (which just come back to bite you in the ass in an audit).   I bet the forms contrived for how Romney and others bypassed having earned income treated and taxed as earned income cannot be logically defended as based on substance.  Therefore, any contrived form to get around the substance and intent would not control the ability to receive capital gain treatment and substance would prevail.

Where is the IRS?  Basking in the sun offshore in the Bahamas in the shadows of Romney’s stash?


Henry Schoenberger is the author of How We Got Swindled By Wall Street Godfathers, Greed & Financial Darwinism ~ The 30-War Against the American Dream; including a foreword by David Satterfield, the former business editor of the Miami Herald, 2 times Pulitzer Prize-winner.

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