Sept. 20 — The Internal Revenue Service is taking a cautious approach to addressing any of the issues raised by the U.S. Court of Appeals for the First Circuit's decision in Sun Capital Partners III, LP v. New England Teamsters & Trucking Indus. Pension Fund, a Treasury Department official said.

The Sun Capital case has been closely watched by the private equity sector because of the possibility that IRS could begin to challenge whether carried interest earned from long-term investment gains should continue to be taxed at capital gains rates or as ordinary income.

The court said at least one Sun Capital fund was not a passive investor and was actively engaged in a “trade or business”—a term that is seen as the border between whether money is taxed as a capital gain or ordinary income (155 DTR K-3, 8/12/13).