Ways and Means Chair Speaks on Carried Interest Compromise
Perhaps one of if not the most controversial pieces of the extenders bill winding its way though Congress is the carried interest provision. Taking on its term from the hedge fund industry, a "carried interest" translated into tax parlance is a profits interest in an entity taxable as a partnership. Under current IRS pronouncements that set forth a safe harbor when issuing such interests, taxable income (ordinary service type) can be avoided while subsequent gains allocable to the dispositions of such interests can qualify for long term capital gain treatment. This substantial tax advantage has caught the attention of the Democratic side of the Congressional tax-writing committees and proposals to reverse this favorable treatment have been introduced during the past year or so.
More recently, on May 11, House Ways and Means Committee Chairman Sander Levin (D-Mich.) stated that a compromise proposal being floated is to allow a phased-in change to the tax treatment of carried interest to be a main offset for the tax extenders legislation moving toward the House floor. Still, the primary legislative vehicle, H.R. 4213, to the disappoint of many, does not carve out the carried interest reform to exempt particular industries as was hoped for by the real estate and private equity industries as well as others. Levin also said lawmakers still are discussing whether to include a provision from the small business tax bill that would raise $7.7 billion by stopping companies from using subsidiaries to channel deductible payments through U.S. tax treaty countries before earnings are repatriated to a tax haven.
