| UPDATE ON CARRIED INTEREST LEGISLATION |
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Many, if not all, investment funds are structured to provide a "carried interest" payment that passes through the fund's general partner, often a domestic LLC, to the fund managers. The general partner has a small investment in the fund, normally 1%, and the carried interest payment, which is now an investment return to the general partner, currently receives capital gains treatment. The carried interest payment, which can be computed in a variety of ways, will normally amount to 20% of the positive return on the fund's investments, and is the primarily vehicle for compensating the fund managers for such management services.
The capital gains treatment of carried interest payments, which bear a heavy resemblance to compensation for services, has recently sparked debate and legislation to change what is viewed by many as a tax loophole for fund managers. On June 25, the House of Representatives voted 233-189 to approve a temporary, one-year patch to the alternative minimum tax (AMT) that would be paid, in part, by taxing income from carried interests as ordinary income. More specifically, under the House bill, the fund managers would receive ordinary income treatment to the extent the carried interest payments do not reflect a reasonable return on invested capital. The Joint Committee on Taxation staff estimates that this change will raise $30.98 billion over the next 10 years.
The bill is expected to face strong opposition by both the Senate and the White House.
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