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 PE, 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, notwithstanding that carried interest is compensation for personal services performed 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, see our five-part series “Happily Ever After? – Investment Funds That Live With ERISA, For Better and For Worse”: Part One (Sep. 4, 2014); Part Two (Sep. 11, 2014); Part Three (Sep. 18, 2014); Part Four (Sep. 25, 2014); and Part Five (Oct. 2, 2014).

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