Legislation was introduced on June 22, 2007 that would tax as ordinary income any income received from a partnership in compensation for services. The proposed carried interest legislation would fundamentally change long-standing and well-understood principles of partnership tax law. U.S. Representative Sander Levin (D-MI) was joined by House Ways and Means Committee Chairman Charles Rangel (D-NY), House Financial Services Committee Chairman Barney Frank (D-MA), and Ways and Means Committee Members Reps. Pete Stark (D-CA), Jim McDermott (D-WA), John Lewis (D-GA), Richard Neal (D-MA), Earl Pomeroy (D-ND), Stephanie Tubbs Jones (D-IL), John Larson (D-CT), Earl Blumenauer (D-OR), Ron Kind (D-WI), and Bill Pascrell (D-NJ) in introducing the legilsation. View Rep. Levin’s legislation, a press release about the bill, and background on the bill.
In addition, the Senate Finance Committee may seek to tax income allocations currently attributable to a carried interest as ordinary income rather than capital gains.
A change in the carried-interest tax rules puts into focus whether or not entrepreneurs will be able to continue to invest intellectual capital and sweat equity for long-term investment purposes.
While this would affect investors in certain hedge funds, the potential repercussions run much deeper into the US economy and include all long-term investment partnership structures, such as real estate, oil & gas, private equity and venture capital.
If enacted, such proposals would make fundamental changes to long standing and well understood principles of partnership tax law, but the scope of those changes cannot be determined until the specifics are made available.