03 Mar 2011 Obama FY 2012 Budget Proposal Again Targets Carried Interests
On February 14, 2011, the Obama administration released its proposal for the FY 2012 budget. Several tax policy issues pursued by the Obama administration in previous years were again included in the budget proposal, including the taxation of “carried interests” as ordinary income.
The movement to tax “carried interests” as ordinary income made significant headway last year. In May 2010, the House passed legislation that would tax partnership allocations to fund managers (and other non-capital contributing service providers) at ordinary income rates as opposed to the preferential capital gains rates enjoyed under current law. That legislation was never approved by the Senate, but Senator Baucus proposed a modified version of the bill in September 2010. The 2010 modification proposed by Senator Baucus has been the subject of heavy criticism, as commentators believe the metaphorical net cast by Congress would capture many more taxpayers than intended. It wouldn’t be the first time.
Generally, the legislation proposed by Senator Baucus would tax a percentage of the gain attributable to “investment service partnership interests” (or ISPIs) at ordinary rates. The problem is that the proposed legislation defines ISPIs broadly and offers few exceptions for relief. When considering partnerships with related parties and tiered partnerships it becomes clear that a single service provider can quickly turn the partnership interests held by many other legitimate, capital contributing partners, into ISPIs taxed at ordinary rates. The proposed rules also require taxation of direct and indirect dispositions of ISPIs, regardless of whether another section of the Internal Revenue Code would preclude or defer taxation. The proposed legislation offers exceptions for holders of “qualified capital” and partnerships with strictly pro-rata allocations, however, commentators find little solace in these exceptions.
The FY 2012 budget proposal is a sign that the Obama administration intends to again push the ordinary income taxation of “carried interests”. Whether that will be pursued under the Senator Baucus proposal or another is yet to be determined.Disclaimer: This blog and website are public sources of general information concerning our firm and its lawyers, as well as the information presented. They are intended, but not promised or guaranteed, to be correct, complete, and up-to-date as of the date posted. This blog and website are not intended to be, and are not, sources of legal opinion or advice. The materials, information, and communications on this blog and website do not apply to any particular person, entity, or situation, and do not apply to you or to your specific situation. You will need to consult with an attorney and/or other appropriate professional about your specific situation. Thank you.