By: Amanda Wilson
Yesterday, Senator Al Franken sent a letter to the Department of Treasury taking aim at “carried interest” income. In the letter, Senator Franken asked the IRS to revise Form 1065 (the tax return form for partnerships) to require disclosure of “carried interest” income. Senator Franken stated that this will help stop the financial industry from “hid[ing] the extent to which the industry is taking advantage of the carried interest income classification “.
Why does this matter? Private equity and investment funds structure their partnership agreements to provide that a portion of their compensation be received as “carried interest” income, which generally qualify for the more preferential capital gains rate (20% tax rate) rather than the ordinary income rate (39.6% maximum tax rate). Members of Congress and the Obama Administration have repeatedly called out “carried interests” as an objectionable tax loophole, and have made unsuccessful attempts to do away with “carried interests”. This letter appears to be the opening shot in a new “carried interest” battle.