Friday, October 17, 2014

Update on Private Equity Magic

Update on Private Equity Magic

Earlier this week, I wrote about what we can learn from Bruce Rauner’s tax return.  Mr. Rauner is running for Governor of Illinois and was a found of GTCR, a private equity firm (see, “Private Equity Magic: Converting Ordinary Income into Capital Gains [September 14, 2014]”).  In my post I pointed out that Mr. Rauner had not reported any income in 2011, 2012, or 2013.  While this is true, it is not the most telling clue on Mr. Rauner’s federal tax return.  Gregg Polski, Willie Person Mangum Professor of Law at the University of North Carolina, sent an important correction to my post.

In order to see the true impact of Mr. Rauner’s ability to convert ordinary income into capital gains, Mr. Polski directed my attention to line 56 of Form 1040.  Line 56 is where the taxpayer reports the amount of self-employment tax, which would be derived from receiving “other income.” GTCR should have generated a lot of “other income” for Mr. Rauner.  I should have caught this point because I’ve spent the last fifteen years paying he self-employment tax.  At present, it’s 15.3% on the first $110,000 of income.  In 2011, 2012, and 2013, Mr. Rauner paid $0, $15,777 and $1,848, respectively.  In other words he had little or no reportable other income from the business, despite reporting tens of millions of dollars in taxable income and running a multi-billion private equity firm.

In July 2014, The Chicago Tribune reported Mr. Rauner had taken advantage of the fee waiver and other strategies to reduce his tax liability.[1]


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