IRS Waiting for Congress to Move First on Carried Interest

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By Laura Davison

June 8 — The Internal Revenue Service isn't going to try to make big changes to how carried interest, a share of the profits in an investment fund, is taxed until Congress passes legislation on the issue, an agency official said.

“We’re still in limbo because carried interest legislation is introduced with every opportunity,” Clifford Warren, special counsel to the associate chief counsel (Passthroughs and Special Industries) at the IRS, said June 8 at a Practising Law Institute seminar in San Francisco. “I think there is a sense we may be treading on congressional territory if we try to go that route.”

Analysts have questioned whether the Obama administration would attempt a more expansive move toward tightening rules on how carried interest is taxed as part of upcoming rules on management fee waivers, particularly after regulators took a much broader approach to cracking down on corporate inversions than had been expected.

The IRS issued proposed rules (REG-105346-03) in 2005 that taxed partnership interests when they were doled out as compensation for a service, such as one given to a fund manager. The rules ran into problems because the Subchapter K rules governing partnerships and tax code Section 83 addressing property transfers for services don't mix, Warren said (98 DTR G-7, 5/23/05).

Some Democrats have been trying for nearly a decade to drum up support for legislation that would end the practice where fund managers pay lower capital gains rates, instead of higher ordinary rates, on their profits. The provision has gotten little support over the past decade of attempts, though presumptive presidential nominees Hillary Clinton and Donald Trump have both expressed support for it.

Another reason “it was shelved is because we kept thinking carried interest legislation would get enacted by Congress,” Warren said. “Lo and behold, it still has not materialized and the proposed regs are aging nicely like a fine Gouda on the shelves of our offices.”

To contact the reporter on this story: Laura Davison in Washington at ldavison@bna.com

To contact the editor responsible for this story: Brett Ferguson at bferguson@bna.com