Handicapping the Likelihood of Passage of the Carried Interest Tax Bill
The New York Sun reported on Friday, August 17, that Rep. Charles Rangel believes his plan to combine AMT reform with an increase in the carried interest tax may be veto proof. President Bush opposes the tax. We have previously blogged on Rep. Rangel's idea of combining the two measures. In the Senate, Senator Charles Schumer has said he plans on introducing a bill that would increase the tax on carried interest in all partnerships, not just investment partnerships. The bill co-sponsored by Rep. Rangel would create a new Internal Revenue Code Section 710, which would specifiy that any income with respect to an "investment services partnership interest" would be treated as ordinary income for the performance of services, not capital gain.
An "investment services partnership interest" as defined in Rep. Rangel's co-sponsored legislation is an interest in a partnership held by a person if such person provides, directly or indirectly, in the active conduct of a trade or business, a substantial quantity of any of the following services to the partnership:
- advising the partnership as to the value of any specified asset;
- advising the partnership as to the advisability of investing in, purchasing, or selling any specified asset;
- managing, acquiring, or disposing of any specified asset;
- arranging financing with respect to acquiring specified assets; or
- any activity in support of the above-described services.
"Specified assets" include, generally, securities, real estate, commodities, or options or derivatives contracts with respect to securities, real estate, or commodities. There is a carve out for capital interests, but only if allocations with respect thereto are reasonable. In other words, under the proposed legislation, partners who hold an "investment services partnership interest" and a capital interest cannot escape the ordinary income tax treatment on their income related to investment management services through an unreasonable allocation with respect to their capital interest.
