The state has the potential to reap an extraordinary tax windfall in the coming years as a loophole closes preventing hedge fund managers from keeping certain earnings in offshore accounts.
While experts say it’s impossible to tell exactly how much of an influx the state will see when the change happens on Dec. 31, 2017, “it’s a very big number,” said Richard Levine of Withers Bergman LLP, a law firm specializing in high net worth clients in the New York City area.
Although each hedge fund manager likely is aware of their tax liability, as are their lawyers, specifics are protected under attorney-client privilege laws.
Without exact numbers, there is no telling how much money in the tri-state area will become taxable, but “it’s billions and billions and billions of dollars,” Levine said.
He cautioned, however, that nobody knows how much will be offset by charitable contributions and various mechanisms to protect earnings from becoming taxable, such as creating trust funds.
When the federal law that allowed offshore accounts was changed in 2008, the Joint Committee on Taxation estimated the change would generate about $25 billion over 10 years, including $8 billion in 2017.
“We do not doubt the federal estimates and have every reason to anticipate a significant revenue gain after the final year for federal repatriation ends in 2017,” Department of Revenue Services Commissioner Kevin Sullivan said. “This was an important final step to recover taxes that taxpayers were attempting to hide by offshoring income.”
However, the exact amount expected to come into the state is still undetermined, because “for some reason, neither Congress nor the IRS required specific disclosure at either the federal or state level,” Sullivan said.
Taxes attributable to repatriation income will have to be inferred from significant differences in reporting or through the state audit process, he said.
Some experts have estimated the amount of money that will become taxable nationwide approach or top $100 billion. Whatever the case, in Connecticut, Levine said he “absolutely” expects a large influx of tax dollars coming into the state next year.
When the tax code was changed, Levine said, those who own hedge funds would have had to have had a substantial amount of money in order to defer the funds offshore in the first place, and while he wouldn’t give specifics, he said many of them were living in Greenwich.
“You know who these people are,” he said, adding that it was an “absolute certainty” that they would keep funds offshore in order to defer tax payments.
“Of course, it’s all offshore today,” he said, adding that he would be “very, very surprised” if the state doesn’t see a spike in tax payments in 2017.
Greenwich resident Steven Cohen, the operator of the Stamford-based hedge fund firm SAC Capital Advisors, is estimated to be worth $11.2 billion as of last month, according to Bloomberg.
Sullivan said DRS is in the process of notifying hedge funds that reporting payments is required in Connecticut and that state tax filings will be revised to require specific disclosure of amounts repatriated.
Furthermore, he said, taxpayers may not dodge repatriation payment obligations by simply relocating their primary residence now, because taxability is based on years prior to 2017.
However, he added that his agency is “concerned that tax and trust planning may be used to evade payment in part or in full.”
“Again, it’s unfortunate that Congress did not act to prevent this possibility but we are exploring our legal options to do so at the state level,” Sullivan said.
