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Debate still continues on US carried interest

28 December 2010

Richard Zarin and William Zimmerman of Morgan Lewis & Bockius investigate why the US Congress is having such difficulty passing carried interest legislation.

Since 2007 the US Congress has considered legislation numerous times that would subject investment fund managers to increased US federal income taxes on the share of investment partnership profits they are allocated in return for investment advisory services provided to such partnerships (carried interest). Why hasn't some form of carried interest legislation been passed to date? We believe the answer to this question is quite simple: The line drawing necessary to differentiate (and impose additional tax on) income attributable to investment management services provided by partners to US partnerships, without changing the favoured tax treatment of true equity investments in such partnerships, is just too difficult in light of the flexibility provided in US partnership tax rules, and in the current US political environment.

While there are a number of competing policy factors at play, we believe that two of such factors are the most significant.

The most compelling argument...

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