Full Breakdown
Treasury Secretary Scott Bessent Settles Long-Running Medicare-Tax Dispute
By Drooid · · How we work
Settlement of the Tax Issue
This summer Treasury Secretary Scott Bessent reached a settlement with the Internal Revenue Service over a tax strategy he employed while managing a hedge fund. A person familiar with the matter said the agreement resolved a dispute concerning the use of a limited partnership to classify a large portion of earnings as business income exempt from the 3.8 percent Medicare tax. Senate Democrats had prepared a memorandum indicating that the maneuver allowed Bessent to avoid roughly $910,000 in taxes over three years. At his confirmation hearing the previous year, Bessent disputed that figure but said he would set aside a reserve fund to cover any liability that might arise from ongoing court challenges.
Background on the Medicare-Tax Maneuver
The strategy, common on Wall Street, channels fund earnings through a limited partnership and then treats most of the income as business earnings, which the IRS argues should still be subject to the Medicare surtax. The agency has long maintained that fund managers owe the tax on all income generated by their funds, not only a small slice. Prior to Bessent’s appointment, the IRS had already secured a favorable ruling from the U.S. Tax Court after one hedge fund challenged the agency’s enforcement approach; that decision was subsequently appealed.
Legal Rulings and Senate Response
The Second Circuit Court of Appeals upheld the Tax Court’s decision, confirming the IRS’s position on the maneuver. Following the appellate ruling, a group of Senate Democrats—led by Senator Ron Wyden of Oregon—sent Bessent a letter asking whether he would use his reserve fund to pay the avoided tax, emphasizing that the appellate decision now represents the law of the land in New York and Connecticut, where his hedge fund was headquartered.
Implications for IRS Enforcement
The settlement leaves the IRS with a weakened footing to pursue broader enforcement of the Medicare-tax strategy. The report notes that, under Bessent’s leadership, the agency has lost many auditors and that both the Treasury and the IRS have abandoned a regulatory effort initiated under the previous administration to address the maneuver. The outcome may limit the government’s ability to curb similar tax-avoidance structures in the future.
