New "Compromise" Floated by Chamber of Commerce Would Gut the Carried Interest Provision


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Investment managers are now lobbying furiously to get what they are calling the "enterprise value" tax dropped from the carried interest loophole closer. This provision in the bill would treat gain from the sale of a carried interest (the partnership interest owned by the investment manager) as ordinary income instead of capital gains.
 
The U.S. Chamber of Commerce threw its considerable weight behind the effort to strip this provision from the bill in a letter last week to members of the House. The Chamber's letter is very misleading — it sounds as though the provision will impact all sales of partnership interests, but, in fact, it affects only the manager's interest. A Wall Street Journal editorial is even more misleading, implying that the income of the investment manager will be taxed twice. This is a complete falsehood. Any partnership income that the manager gets increases his tax basis in his partnership interest which will reduce the gain realized on its ultimate sale.
 
This provision must stay in the bill. Otherwise, investment managers can easily avoid the ordinary rates by selling their "carried" partnership interest and paying capital gains taxes on that income. If they reinvest the sales proceeds back into the investment partnership, they have converted their carried interest into a qualified capital interest and will get capital gains treatment on all subsequent partnership income.

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