It appears increasingly likely that Congress will pass “carried interest” legislation as a revenue raiser to pay for the extension of certain other tax breaks. Further information from Goodwin Procter on this topic is available here and in our previous client alerts: “President Obama Proposes to Tax Carried Interests as Ordinary Income” and “Developments in Carried Interest Taxation.”
As proposed, the carried interest legislation would generally treat the incentive allocations received by sponsors of investment funds organized as partnerships and LLCs as ordinary income (rather than capital gain as is generally the case under current law). More specifically, the most current version of the legislation would treat 75% of the incentive allocation as ordinary income, but allow 25% to continue to be taxed as capital gain, for 2013 and thereafter. With respect to 2010, 2011 and 2012, it appears that 50% of the incentive allocation would be treated as capital gain and 50% as ordinary income.
There may, however, be planning opportunities to limit the impact of the carried interest legislation with respect to existing investments. Any planning opportunities will need to be acted upon very quickly as it is anticipated that the legislation will be passed shortly. It is, of course, possible that the final legislation could differ from the current proposed version.
To discuss further, please contact your regular Goodwin Procter attorney or any of our tax partners listed here.