Camp Defines Private Equity as a Business, Would Boost Taxes on Carried Interest

By :: February 27th, 2014

In the tax reform roadmap he released yesterday, House Ways & Means Committee Chair Dave Camp (R-MI) targeted the trillion dollar private equity industry.  Not only did he propose to tax the compensation of private equity managers at ordinary rates rather than lower capital gains rates, he also called the industry out.

The official description of Camp’s plan asserts:

A partnership (e.g., a private equity fund) that is in the business of raising capital, investing in other businesses, developing such businesses, and ultimately selling them, is in the trade or business of selling businesses.

For the tax law to be applied consistently, the profits derived by such an investment partnership and paid to its managing partners through management fees and a profits interest in the partnership (generally referred to as a carried interest), should be treated as ordinary income.

Thus, Camp deemed the share of a fund’s profits allocated to the manager to be ordinary income.  He stopped short of defining the remaining profits as ordinary income, presumably to protect the other partners (typically, not-for-profit institutions and foreign investors) and to avoid tricky policy questions.

The consequences of this view go far beyond carried interest. For instance, treating a private equity fund as a business  could apply for other purposes of the tax law.  One example:  tomorrow, the U.S. Supreme Court will review a request that it consider a pension case called Sun Capital Partners v. New England Teamsters & Trucking, a dispute that may also turn on whether private equity firms are, in Camp’s words “in the business of selling businesses.”

Camp’s vision is bold—and Congress (or the IRS) should explore it.

3Comments

  1. Michael Bindner  ::  1:27 am on February 28th, 2014:

    Camp should be complimented for suggesting this and maybe there will be some consensus around this. It is the kind of move Occupy might like – which is why the Tea Party Caucus in the House may reject it out of hand. If this is going anywhere, Nancy Pelosi must come to the rescue and hope something can get through the Senate. I would still like something that stops most families from filing taxes – shifting this to employers – while maintaining progressive taxation of the rich and having employers give a beefed up child tax credit to families – with an added feature of having the employer contribution to Social Security funded through this tax – with offsets for voting stock grants to employees (with an equal grant to eachy worker). I regret that I won’t get my wish, but it would be nice if Camp got at least a vote on his and some Treasury staff support.

  2. A Potentially Hostile Tax Environment for Private Equity Firms | Berkeley Business Law Journal  ::  6:43 pm on April 3rd, 2014:

    […] equity funds as being in the busi­ness of sell­ing busi­nesses, this pro­vi­sion may also have sec­ondary con­se­quences in addi­tion to tax­ing car­ried inter­est at the ordi­nary income rate, includ­ing […]

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