Paul Roth sees tax dangers in toxic asset plan

NEW YORK (Reuters) - Leading hedge fund attorney Paul Roth said on Wednesday he has warned clients that the U.S. government's plan to clear toxic assets from the nation's banks has tax implications making it unprofitable for funds to participate.

The Treasury Department on Monday unveiled a plan offering to provide as much as $1 trillion in financing for large investment funds that agree to acquire assets from the books of troubled banks. Many analysts concluded the program could be a windfall for funds, who could use public money to generate sizable gains from distressed assets.

But Roth, speaking at the Reuters Private Equity and Hedge Funds Summit in New York, said the program also poses some potential pitfalls.

"This is a little bit of left-hand, right-hand. You have a highly leveraged investment program with the government providing the leverage. At the same time, there is a proposal to limit itemized deductions beyond 28 percent," said Roth.

"We have run numbers where profitable investments became unprofitable," he added.

In a related area, Roth said a senator introduced a bill intended to stop tax haven abuse, but the law would adversely affect foreign money coming into the United States from offshore managers.

These offshore funds, many owned by U.S. institutions, are potentially a large source of capital that could be put to work.

"They're inviting hedge funds to buy loans off of the banks' balance sheets," he said. Yet "there is an enormous lack of clarity what the tax implications would be for an offshore fund. We can't get the Treasury to give us an adequate answer."

Without that clarity, many funds may stay on the sidelines.

These issues "will be a negative drag in terms of people making decisions to participate," he said. "That will be an inhibitor."

(Editing by Phil Berlowitz)