Private Equity Tax Break in Danger

Private Equity Tax Break in Danger (New York Times)

A ruling against Sun Capital Partners in a case regarding pension fund liability has placed the tax treatment of carried interest at risk. Carried interest is the profit made a by a private equity advisor from investing in companies. This profit is taxed under the capital gains rate at 20%, instead of the income rate of up to 39.6%. Part of the rationale for the favorable tax rate is that it is from investing and therefore cannot result from “trade or business.” In the pension case, a court rejected this characterization of Sun Capital Partners’ relationship with the pension fund of a company it bought-out, because Sun Capital was actively involved in the bought-out firm’s management and operation. The Obama Administration, which has been seeking to tax carried interest at an income rate, may find this is the legal justification required to direct the I.R.S. to issue new rules.