According to a couple of sources, members of the Senate Finance Committee are considering a proposal to change the tax treatment of a carried interest. (A carried interest is the profits interest in partnership received as compensation by VC and private equity fund managers.) My Two and Twenty paper addresses this very issue, and now offers a handy menu of reform alternatives. While treating carry as ordinary income is appealing - we normally treat returns on human capital as ordinary income - I think there are some strong arguments for other reform alternatives as well.
I'll post more about this when I get an updated version up on SSRN (and finally submitted to law reviews!) next week.
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1. Posted by Michael Guttentag on March 8, 2007 @ 23:35 | Permalink
I’m curious: if you were the policy maker and had a binary choice between treating the carried interest as ordinary income or treating the carried interest as a capital gain which you would choose. Or are you going to make us wait until we read the paper, and are convinced that either approach would be folly?
2. Posted by Vic on March 9, 2007 @ 5:24 | Permalink
With only two choices, I suspect that ordinary income is the better way to go, as it reduces the costs associated with wasteful tax planning, including the distortion of contract design between the fund managers and LPs.
3. Posted by Jake on March 9, 2007 @ 19:30 | Permalink
Sol Diamond was correctly decided. Even if not, section 83 prescribes the rule. If there is to be an exception under Subchapter K, Congress must enact it. To date, it has not. Thus ordinary income.
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