TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Wednesday, September 25, 2013

First Circuit Ruling Threatens Tax Foundation of Private Equity Industry

Bloomberg:  Carried-Interest Break Seen at Risk After Court’s Ruling, by Richard Rubin:

A federal court ruling that’s captured the attention of the private equity world and U.S. government officials has the potential to undercut the legal tax foundation of the buyout industry.

The ruling, in a pension-law case involving Sun Capital Partners Inc., determined that private-equity funds were engaged in a “trade or business” and weren’t merely passive investors who could back out of pension-funding liabilities.

If courts or regulators apply that logic to the U.S. tax code, the changes could jeopardize the structure of the industry by altering some core benefits of private equity. Those are low-taxed carried interest for fund managers, tax-free income for universities and an exemption from U.S. taxes for foreign investors. ...

The court case poses a significant challenge to private equity, beyond the often-discussed proposals from President Barack Obama and other Democrats to raise taxes on fund managers’ carried interest -- a push that has foundered for six years in Congress.

So far, the Treasury Department and the Internal Revenue Service have been cautious in reacting to the legal ruling, saying publicly only that they’re looking at the issue carefully.

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eh. different statutory scheme. if I were in PE I wouldn't sweat it.

Posted by: jpe | Sep 25, 2013 3:38:14 PM