June 8, 2010

Senate Amendment Proposes Changes to “Carried Interest” Legislation

Following its Memorial Day recess, the U.S. Senate has taken up consideration of H.R. 4213, the bill containing the proposed changes to the taxation of carried interest as a revenue offset, passed by the House of Representatives on May 28. Today, Max Baucus (D-MT), Chairman of the Senate Finance Committee, introduced an amendment to the legislation regarding the taxation of carried interest. This amendment retains the effective date of the House of Representatives bill, as modified by a floor amendment introduced on May 28, which would limit the application of the provision to taxable years ending after December 31, 2010. Importantly, this amendment would also limit the conversion of capital gain income to ordinary income under the provision (after the phase-in period) to 65% of income, leaving 35% to be taxed as capital gains. This is more favorable than the legislation passed by the House of Representatives which taxed 75% of carried interest as ordinary income, leaving only 25% to be taxed as capital gains. Furthermore, the amendment provides that if assets are held for longer than seven years prior to sale, the percentage of carried interest subject to taxation as ordinary income would be further reduced to 55%, leaving 45% of such income to be taxed as capital gains.

We will continue to monitor the progress of this legislation and keep you apprised of developments as they unfold. If you have any questions, please contact any of our tax partners listed here.