The Sound and Fury of Carried Interest Reform

Columbia Journal of Tax Law, Vol. 1, p. 1, 2010

45 Pages Posted: 16 Jul 2009 Last revised: 11 Sep 2015

See all articles by Karen C. Burke

Karen C. Burke

University of Florida Levin College of Law

Date Written: February 25, 2010

Abstract

Of all the proposals advanced in recent years to reform Subchapter K, the part of the Internal Revenue Code governing partnership tax, perhaps none has generated more acrimony and confusion than the pending carried interest legislation contained in proposed ยง 710. While reformers have framed the issue of taxing the compensatory portion of a service partner's return as ordinary income in terms of distributive justice, critics have been quick to invoke the rhetoric of class warfare to fend off reform. In the most elementary terms, the carried interest legislation would tax some (but not all) of a service partner's share of partnership profits as ordinary income. Even at this basic level, however, the contours of the proposed legislation are ambiguous. Indeed, the reform is sometimes misdescribed as taxing "distributions" rather than "distributive shares" as ordinary income, a distinction that is fundamental. Moreover, the precise tax advantage of carried interest arrangements depends crucially on whether one adopts a "joint-tax" perspective or focuses more narrowly on the service partner's opportunity for deferral and conversion. Apart from the merits of carried interest legislation, there is also considerable dispute over whether such reform is likely to raise significant amounts of revenue.

Keywords: carried interests, proposed 710, H.R. 1935, deferred compensation, option equivalence, qualified capital exception, DRIP treatment, joint-tax perspective, 83 election

JEL Classification: K34

Suggested Citation

Burke, Karen C., The Sound and Fury of Carried Interest Reform (February 25, 2010). Columbia Journal of Tax Law, Vol. 1, p. 1, 2010, Available at SSRN: https://ssrn.com/abstract=1432552 or http://dx.doi.org/10.2139/ssrn.1432552

Karen C. Burke (Contact Author)

University of Florida Levin College of Law ( email )

P.O. Box 117625
Gainesville, FL 32611-7625
United States

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