Proposed Legislation Would Increase Tax on Carried Interest, Target Perceived Tax Abuses, and Renew Tax Incentives


On May 20, 2010, the House Ways and Means Committee and the Senate Finance Committee released the text of new legislation that would include important changes in the way partners with “carried interests” in investment partnerships are taxed, along with other significant “loophole closing” changes to the Internal Revenue Code, and other amendments. The proposed legislation, the “American Jobs and Closing Tax Loopholes Act of 2010,” H.R. 4213 (the Bill), would renew several expiring tax incentives and enact new provisions intended to promote job creation. To offset these costs, among other provisions, the Bill would:

• tax 75% of income (50% until 2013) attributable to a “carried interest” in an investment services partnership as ordinary income, even if it would otherwise have qualified as long-term capital gain;

• subject certain partners and S corporation shareholders to self-employment tax on their distributive shares of income; and

• target several structures and transactions in the corporate and international arenas identified by Congress as potentially abusive.

Selected major provisions of the Bill are summarized in more detail below.

Please see full alert below for more information.

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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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