Number: RS22717
Title: Taxation of Private Equity and Hedge Fund Partnerships: Characterization of Carried Interest
Authors: Donald J. Marples, Government and Finance Division 
Abstract: General partners in most private equity and hedge funds are compensated in two ways. First, to the extent that they contribute their capital in the funds, they share in the appreciation of the assets. Second, they charge the limited partners two kinds of annual fees: a percentage of total fund assets (usually in the 1% to 2% range), and a percentage of the fund's earnings (usually 15% to 25%, once specified benchmarks are met). The latter performance fee is called "carried interest" and is treated, or characterized, as capital gains under current tax rules. H.R. 6275, introduced by House Ways and Means Committee Chairman Charles Rangel on June 17, 2008, would make carried interest taxable as ordinary income. H.R. 6275 was passed by the House of Representatives on June 25, 2008. Other legislation (H.R. 2834 and H.R. 3996) made similar proposals. This report provides background on the issues related to the debate concerning the characterization of carried interest.
Pages: 5
Date: July 8, 2008