For the last decade, discussion in Congress has periodically centered on the tax treatment of so-called carried interests (or "carry"). Carried interests generally refer to the fee a manager receives on the profits of a fund he or she manages. Currently, carried interests are taxed on the appreciation of fund assets at capital gains tax rates (i.e., 20%). Commentators have argued whether capital gains or ordinary income is fair treatment for the carried interest. While during previous Congresses the debate never was translated into legislation, this Congress may be different.

In recent years, several members of Congress have introduced bills that respond to concerns about unduly favorable tax treatment for holders of carried interests. Two proposals in particular – introduced by Rep. Sandy Levin (D-MI) and former House Ways & Means Chairman Dave Camp (R-MI) (the "Camp Bill") – have drawn considerable attention.

Rep. Sandy Levin introduced the Carried Interest Fairness Act (H.R. 2889) in June 2015 (the "Levin Bill") (Senator Tammy Baldwin (D-WI) introduced an identical bill in the Senate). This legislation would tax as ordinary income any amounts received from a partnership in compensation for services.

Specifically, the Levin Bill treats as ordinary income any capital gains arising from investment services partnership interests (ISPIs). The Levin Bill defines ISPIs as interests in investment partnerships held by any person in connection with the conduct of certain businesses by such person (or any person related to such person). An exception is provided to the extent the allocated income amount represents a return on capital that the manager actually invested in the partnership.

The Camp Bill, which was one element in Chairman Camp's comprehensive 2014 tax reform package (The Tax Reform Act of 2014), adopts a different approach. The Camp Bill applies only to "applicable partnership interests" (APIs) – that is, partnership interests held by a taxpayer in connection with the performance of services by the taxpayer, or any other person, in an "applicable trade or business" (ATB).

A partner subject to the Camp Bill effectively is treated as borrowing an amount equal to the partnership capital that it would need to fund its proportionate share of partnership profit. The imputed interest on this "loan" (calculated as the federal long-term rate plus 10 percentage points) becomes the partner's "recharacterization account balance" (RAB). All future income or gain allocated to the partner becomes ordinary income to the extent of its RAB. Income and gain allocations over and above the RAB can still qualify as capital gains.

The Camp Bill is significantly narrower in scope than the Levin Bill. As the Camp Bill defines ATBs as businesses conducted on a regular basis which consist of (i) raising or returning capital, (ii) investing in (or disposing of) businesses (or identifying businesses for investing or dispositions), and (iii) developing such businesses, partnerships should meet the ATB requirement only if they satisfy all three prongs of the ATB definition. In contrast, the Levin Bill applies to any trade or business that primarily involves the performance of the following services with respect to assets held by the partnership: (i) advising as to the advisability of investing in, purchasing or selling any specified asset, (ii) managing, acquiring or disposing of any specified asset, (iii) arranging financing with respect to acquiring specified assets, and (iv) any activity in support of these services.

Another key difference involves the computation of the recharacterized amount. Under the Camp Bill, only the amount of the deemed "interest" on the "loan" would be treated as ordinary income. In contrast, the Levin Bill would recharaterize as ordinary income all gain arising from the service partner's ISPI (except to the extent the income is attributable to the partner's investment in the partnership).

Neither proposal has been enacted into law. In fact, neither the House Ways & Means Committee nor the Senate Finance Committee took any action with respect to the two bills. However, the political landscape has changed dramatically in the past year – culminating with the election of President-elect Trump, who often cited the need to repeal the "carried interest" rule during his campaign appearances. While President-elect Trump has yet to release any specifics, the Levin Bill and the Camp Bill each offer a different approach to accomplishing this objective. It is conceivable that President-elect Trump could adopt one of these proposals in his comprehensive tax reform package for 2017.