On October 5, MFA submitted comments in response to the proposed rules to implement changes to the tax treatment of carried interest under section 1061 of the Internal Revenue Code. In the letter, we encouraged Treasury and the IRS to: (1) adopt the portions of the proposed rules that treat subsequent earnings on capital as returns on invested capital, regardless of whether the capital was initially earned as carried interest; (2) amend overly restrictive portions of the rules that would subject invested capital to recharacterization under section 1061, inconsistent with the intent of the statute; (3) amend the related party transfer rules to avoid subjecting non-taxable transfers to immediate taxation; (4) tailor the definition of applicable partnership interests subject to section 1061 so as not to include management contracts and other partnership interests that do not include carried interest arrangements; and (5) adopt the portions of the proposed rule that exclude qualified dividend income and capital gains under Sections 1231 and 1256 from the scope of the rule, consistent with the statute.
