Am I the Only Person Paying Taxes?: The Largest Tax Loophole for the Rich – Exchange Funds

Abstract

President Obama is faced with a national debt of over $11 trillion and needs to fund projects such as National Health Care with an ever-shrinking tax base. As the economy has slowed, so have tax revenues. It would then make sense for the government to re-examine tax carve-outs that only benefit the wealthy. In fact, President Obama is on record saying he wants to eliminate tax loopholes. After almost fifty years, the time is ripe to eliminate one of the only congressionally-authorized tax loopholes - the $30 billion in “Exchange Funds.” This Article addresses the social equity arguments and the tax and economic theories to solve the perceived problem. The Article covers, through access to materials not previously seen (including fund private placement memoranda), the basics of fund details, fund formations, the tax rules, and the solutions to solve the social inequity. This Article not only proposes how to create legislation to tax the current arrangements, but also offers a creative solution utilizing current code sections to tax these vehicles.

Keywords: banking and finance, legislation, partnerships, securities law, taxation, taxation-federal income, exchange funds