The Hedge Fund Law Report

The definitive source of actionable intelligence on hedge fund law and regulation

Articles By Topic

By Topic: Carried Interest Taxation

  • From Vol. 10 No.13 (Mar. 30, 2017)

    Fund Managers Must Address Investors’ Fee and Liquidity Concerns to Maintain Strong Performance in 2017, While Also Preparing for Trump Administration Regulations

    By many indices, the hedge fund industry in early 2017 shows strong signs of recovery after a difficult year marked by heavy outflows. Returns are up and optimism abounds in the midst of the pro-business atmosphere fostered by the new administration of President Donald J. Trump. See “Ways the Trump Administration’s Policies May Affect Private Fund Advisers” (Mar. 2, 2017). This positivity is tempered, however, by concerns over whether fund managers can align their interests with investors’ fee and liquidity concerns, as well as whether funds are making use of an appropriate beta hurdle. Further, there is a great deal of uncertainty about the impact of the Trump administration’s emerging policies and priorities on the SEC’s enforcement efforts, the Dodd-Frank Act, carried interest and the Department of Labor’s fiduciary rule. To cast light on these and other critical issues, The Hedge Fund Law Report recently interviewed Steven Nadel, a partner in the investment management practice at Seward & Kissel and lead author of Seward & Kissel’s recently published “2016 New Hedge Fund Study.” See “Lock-Ups and Investor-Level Gates Prevalent in New Hedge Funds” (Mar. 23, 2017). For additional commentary from Nadel, see “HFLR and Seward & Kissel Webinar Explores Common Issues in Negotiating and Monitoring Side Letters” (Nov. 10, 2016); and “Seward & Kissel Partner Steven Nadel Identifies 29 Top-of-Mind Issues for Investors Conducting Due Diligence on Hedge Fund Managers” (Apr. 4, 2014).

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  • From Vol. 3 No.4 (Jan. 27, 2010)

    What Effect Will the Carried Interest Provision in the Tax Extenders Act Have on Hedge Fund Managers that Are or May Become Publicly Traded Partnerships?

    On December 9, 2009, the U.S. House of Representatives passed legislation that includes a provision that would tax as ordinary income any net income derived with respect to an “investment services partnership interest.”  This carried interest provision in the Tax Extenders Act of 2009, H.R. 4213, would change the tax treatment of the performance allocation that, in years in which a hedge fund has positive investment performance, constitutes the bulk of a hedge fund manager’s revenue.  Currently, most managers structure performance allocations so that all or most of such compensation is taxed as long-term capital gains at a rate of 15 percent.  The carried interest provision would subject such compensation to tax at ordinary income rates, which for hedge fund managers generally would be at a marginal rate of approximately 35 percent.  For more discussion of the Tax Extenders Act, see “Bills in Congress Pose the Most Credible Threat to Date to the Continued Tax Treatment of Hedge Fund Performance Allocations as Capital Gains,” The Hedge Fund Law Report, Vol. 2, No. 52 (Dec. 30, 2009).  The Extenders Act also contains a provision that would effectively cause any publicly traded partnership (PTP) that derives significant income from investment advisory or asset management services to be treated, for tax purposes, as a corporation.  This is because the provision would treat carried interest income as non-qualifying income for purposes of determining whether a PTP meets the 90 percent “good income” test.  That test specifies that partnerships that (1) satisfy the 90 percent good income test (described in more detail in this article) and (2) are not registered under the Investment Company Act of 1940 will, in general, continue to be treated as partnerships and not as Subchapter C corporations for federal income tax purposes.  This article examines the federal tax treatment of the carried interest received by hedge fund managers, as well as the tax treatment of PTPs.  The article also outlines the likely effects of the Extenders Act on the tax treatment of both, and explains tax planning steps that hedge fund managers may take to avoid some of the adverse tax consequences of the bill.

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  • From Vol. 2 No.7 (Feb. 19, 2009)

    Climate in Washington Warms to Proposals to Tax Carried Interest as Ordinary Income, as Prospect for Material Revenue from Such Tax Wanes

    In a series of exclusive interviews with members of both houses of Congress from both sides of the aisle, and members of their staffs, The Hedge Fund Law Report has determined that the appetite among Democratic legislators for taxing carried interest as ordinary income remains high, while opposition among Republicans to increasing taxation of carried interest remains equally vigorous.  In this climate of negative returns, the sizes of both management and performance fees are under pressure (primarily from hedge fund investors as opposed to regulators), and many managers will not earn a performance fee until they exceed their “high water mark” – the highest level their funds previously reached – which in many cases appears to be a far-away prospect.  Accordingly, for practical purposes, the level of taxation of hedge fund manager carried interest may be moot for the time being, since for the foreseeable future there will not be any carried interest to tax.  Nonetheless, in this dour economic environment, legislators may look to placate their Main Street constituents with actions targeting “executive compensation,” very broadly understood.  So, even though increasing taxation of carried interest may have only a minor near-term economic benefit, it may have a symbolic resonance.  That is, the setting may be ripe for finalizing a legislative item at precisely the time when it will yield the least revenue.  We bring you insight directly from Capitol Hill, including quotes from Rep. Charles Rangel (via a spokesman), Rep. Elijah Cummings, Senator Orrin Hatch and the office of Senator Mike Crapo.

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