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Elizabeth Warren, fellow senators press IRS on tax loophole

Senator Elizabeth Warren of Massachusetts wants the IRS to drop a waiver that allows private equity fund managers to pay a lower tax rate on their income from management fees.Zach Gibson/New York Times/File 2015

Senator Elizabeth Warren set her eyes on a new target Tuesday: an obscure part of the federal tax code that gives private equity managers a lucrative break on some of their income.

In a letter signed by three of her Democratic colleagues in the Senate, Warren urged the Internal Revenue Service to finalize a rule it proposed in July aimed at forcing fund managers to apply a higher tax rate to income from management fees.

The proposed rule is a regulatory way of narrowing the carried interest loophole, a tax benefit that has come under attack by Democratic presidential candidates and even some Republicans. The candidates want private equity partners to pay higher taxes on all earnings — a change that would require Congress to act.

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Pushing federal agencies to use their regulatory and rule-making authority is a lever that Warren likes to use, particularly given that Republican control of Congress makes it next to impossible for her to enact her agenda via legislation.

The letter is a classic Warren opening salvo for a Washington fight: She tends to put agencies on notice that she’s tracking a part of their process that typically gets little attention, and then uses her star power with the media to broadcast her concerns.

Warren recently sent a far harsher letter to the chairwoman of the Securities and Exchange Commission with a laundry list of complaints, including what she says is heel dragging on a rule forcing public companies to reveal the ratio between CEO and worker pay.

In that case, the SEC quickly acted on Warren’s demand, finalizing the rule on Aug. 5.

In the issue raised Tuesday by Warren, the Internal Revenue Service is already moving in a direction that the senator and her colleagues applaud. This summer the agency proposed the rule making it more difficult for fund managers to obtain so-called fee waivers that allow them to apply the lower capital-gains tax rates on the portion of their income derived from fees.

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Compensation for private equity managers typically comes from two sources: a percentage of the gains on investments, which are subject to low capital gains tax rates, and management fees, which are taxed at higher rates without the waiver.

“For over a decade, many private equity fund managers have used these waivers to disguise payments for services as capital gains,” according to the letter, which was also signed by senators Al Franken of Minnesota, Tammy Baldwin of Wisconsin, and Sheldon Whitehouse of Rhode Island. “This sort of tax cheating must be stopped.”

Read the letter below:


Annie Linskey can be reached at annie.linskey@globe.com. Follow her on Twitter @annielinskey.