On Friday, by a 215-204 vote, the House passed the 2010 tax extenders bill, H.R. 4213, the American Workers, State, and Business Relief Act of 2010, that would, if also approved by the Senate, significantly change the taxation of carried interests in certain investment partnerships (including hedge funds, venture capital funds and private equity funds, but not certain partnerships controlled by real estate investment trusts). The Obama Administration supported the change in its proposed FY 2011 budget.
“Carried interest” is an interest in an investment fund that entitles the fund manager or an affiliate to receive a specified share, often 20%, of profits earned by the fund, without requiring any investment of capital. The income from carried interest is treated as investment income and, to the extent the underlying interest is long-term capital gain, realized gain is treated as long-term capital gain, taxed at 15%, rather than ordinary income. Under the bill passed by the House, beginning in 2011, 50%, and beginning in 2013, 75% of any individual's gain or loss on an "investment services partnership interest" generally would be taxed as ordinary income or loss, with the remainder continuing to be taxed at capital gains rates. The bill also would generally treat as ordinary income gains realized upon the disposition of an investment services partnership interest.
The Senate is expected to take up the bill after it returns from the Memorial Day recess.