Treasury Secretary Scott Bessent this summer settled a dispute over a strategy he used as a hedge fund manager to avoid paying thousands in taxes, according to a person familiar with the matter.
Before joining President Trump’s cabinet, Mr. Bessent led a hedge fund and relied on a tax maneuver common on Wall Street that allowed him to avoid paying the 3.8 percent tax that funds Medicare. The tax strategy involved channeling earnings through a limited partnership and then designating much of the income as business earnings exempt from the Medicare tax. For years, the I.R.S. has argued that people like Mr. Bessent owe the Medicare tax on all of their income earned at their funds, not just a small slice of it.
Ahead of Mr. Bessent’s confirmation hearing last year, Senate Democrats prepared a memorandum that showed Mr. Bessent was able to avoid paying $910,000 in taxes over three years by using the maneuver. At the hearing, Mr. Bessent disputed that amount but said he would set aside a fund of money to potentially pay the taxes he would have owed, depending on how court challenges to the I.R.S. enforcement effort played out.
That put Mr. Bessent, who was for a time the acting I.R.S. commissioner, in the unusual position of having a personal stake in how the agency interprets tax law. The U.S. Tax Court had already sided with the I.R.S. after one hedge fund challenged its attempts to crack down on the tax strategy that Mr. Bessent employed. That fund, as well as others, appealed the Tax Court decision.
Earlier this month, the Second Circuit upheld the Tax Court decision, affirming the I.R.S. approach to the issue. On Wednesday, a group of Senate Democrats sent Mr. Bessent a letter asking if he would adhere to the appellate ruling.
“Thus, the law of the land for the Second Circuit — which includes New York and Connecticut, where your hedge fund was headquartered and operated — is now the I.R.S. position that you disregarded during your confirmation process,” the Democrats, led by Senator Ron Wyden of Oregon, wrote. “Now that the appellate court has spoken, will you use your reserve fund to pay the avoided tax?”
It is unclear when exactly Mr. Bessent settled the tax issue, just as it is unclear how much in additional tax he may have paid to the I.R.S.
Under Mr. Bessent, the I.R.S. is in a weaker position to enforce the issue more broadly. The agency has lost many of its auditors, and the Treasury and I.R.S. also abandoned an effort, started under the Biden administration, to develop regulations addressing the tax maneuver.
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