Proposal to More Than Double Tax Rates
for Carried Interests
Under Consideration in Congress
By now, most of
you are likely aware that Congress is considering a proposal that would tax
"carried interest" arrangements.
"Carried interest" is the 20 percent return that a private
equity or venture capital fund earns if it returns a profit, and Congress is
considering taxing that interest at ordinary income tax rates (as high as 35
percent) instead of capital gains rates (approximately 15 percent). The principals at our affiliate in
Private equity funds (and, in particular, hedge funds) have become a political target for increased regulation in recent years. Now, it would seem that taxing authorities are also taking note. Private equity funds can generate significant profits and, in turn, the carried interests earned by the managers of these funds can generate significant tax revenues for the government. The taxing of these funds should be balanced against the important role they serve in the global economy such as financing developing technologies and start-up businesses as well as facilitating management buyouts. In fact, Thomson Financial has estimated that private equity funds may account for as much as one-fifth of worldwide global deal activity.[1]
The most
difficult task for Congress will be to craft the language of the proposed
legislation narrowly enough so that it only impacts the profit interests of
managers of investment funds. If drafted too broadly, it could turn a
partnership tax regime, which applies to flow-through entities that provide any
number of services and which has been well-established for over a half-century,
on its ear. The amounts at stake are
believed to be in the billions of dollars, and could go a long way to address
other areas that Congress is grappling with such as tax "reform" and
budget balancing. Hopefully, Committee
members will be sensitive to this delicate balance and Congress will proceed
cautiously with respect to regulation of private equity funds.
To learn more, please contact Thomas F. Schnellenberger, Michael Buker or John R. Thornburgh.
[1] Source: http://money.cnn.com/2007/03/29/markets/pe_taxes/index.htm?postversion-2007032914
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