Taxation of Carried Interests for Senior Level Fund Managers (Part One of Four)

Carried interest arrangements have been common for years in many types of private investment funds, including private equity, real estate and hedge funds. Carried interest arrangements can be controversial, in part, because of the ability of fund managers to treat the pass-through of earnings in certain types of funds as long-term capital gains for tax purposes, notwithstanding that the carried interest arrangement provides for compensation in connection with the performance of personal services by the fund manager. In a four-part guest series, Arthur H. Kohn, partner at Cleary Gottlieb, along with Andrew L. Oringer and Steven W. Rabitz, partners at Dechert, summarize the principal U.S. federal income tax and related design considerations associated with carried interest arrangements for fund managers. This first article provides background on carried interest arrangements and examines relevant analytical considerations, including the statutory scheme; judicial background; proposed regulations; applicable revenue procedures; and capital shifts and book-ups. The remaining articles in the series will outline numerous practical and design considerations. For additional insights from Oringer and Rabitz, see our four-part series “A ‘Clear’ Guide to Swaps and to Avoiding Collateral Damage in the World of ERISA and Employee Benefit Plans”: Part One (Jul. 28, 2016); Part Two (Aug. 4, 2016); Part Three (Aug. 11, 2016); and Part Four (Aug. 25, 2016).

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