TaxProf Blog: Obama’s Personal Investment Deals Mirror Tax Strategies He Once Criticized

Lee Fang, Obama’s Personal Investment Deals Mirror Tax Strategies He Once Criticized:

Barack Obama campaigned extensively during his presidency to eliminate the “carried interest loophole,” a tax strategy that allows billionaire investors to evade ordinary income taxes.

Hedge funds and other private fund managers use this tax treatment to pay long-term capital gains of 20%, a rate that is almost half of what many working Americans pay.

Obama, while in office, said this “loophole” leads to “folks who are doing very well paying lower rates than their secretaries.”

However, since leaving the presidency, Obama has employed a similar tax strategy to potentially only pay capital gains taxes for the services he has provided to private business interests.

One example of this is Obama’s strategic partnership with NBA Africa, which was announced in July 2021, as part of an expansion of Africa’s largest men’s basketball league. According to private information I obtained, the deal is structured as a “profit interest” share.

This agreement enables Obama to possess a “minority ownership stake” in the NBA Africa venture without making any upfront cash investments.

A profit interest share essentially guarantees a portion of future profits through a contractual promise. Celebrities and sophisticated investors often employ this compensation structure as a legal mechanism to minimize taxes resulting from endorsement deals or advisory services.

If certain monetization events occur, such as the sale of NBA Africa, the income Obama receives from the partnership will only be taxed at capital gains, a rate of 20%. Ordinary business income generated from the deal would be taxed as income.

The favorable tax treatment of money earned through a profit interest arrangement resembles the carried interest loophole, which hedge fund and private equity executives use to pay a capital gains tax rate on multimillion-dollar compensation packages that is often lower than the rate paid by middle-class workers earning salaries.

“The Obama profits interest arrangement is a close cousin to carried interest received by private equity and venture capital fund managers,” said Gregg Polsky, a University of Georgia law professor, and former corporate tax lawyer.

Obama pushed multiple times during his presidency to eliminate the carried interest loophole, which he condemned as a giveaway to the super-rich. …

In 2012, Obama even ran television advertisements criticizing Mitt Romney for his use of the carried interest tax provision during Romney’s career as a private equity executive. In the ad, the narrator claimed Romney “used every trick in the book.”