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Alternative Market Briefing

Other Voices: What Biden's tax proposals mean for private funds

Wednesday, October 06, 2021

Authored by Sonia Kothari and Raj Tanden - Foley & Lardner LLP

On September 13, 2021, the House of Representative Ways and Means Committee introduced tax proposals that, if enacted, would make significant changes to the U.S. federal income tax system. This Alert summarizes some of the proposals that may be relevant to private investment funds.

Carried Interest

Section 10611 recharacterizes long-term capital gain allocated with respect to an applicable partnership interest (API) or recognized upon the disposition of an API as short-term capital gain unless the asset sold has a holding period of greater than three (3) years. An API is a partnership interest held in connection with the performance of services, and generally includes a profits interest or carried interest. Gain determined under Sections 1231 and 1256 qualified dividend income are not subject to recharacterization.

The proposed rule generally expands the scope of the Section 1061 recharacterization to all "net applicable partnership gain" with respect to an API unless an exception applies. "Net applicable partnership gain" is defined as the sum of: (i) net long-term capital gain determined by taking into account gains and losses with respect to one or more APIs, and (ii) other amounts which are includible in the taxpayer's gross income with respect to such APIs that are treated as capital gain or are subject to tax at the rate applicable to capital gain. This would i......................

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