Congress examines carried interest tax.

Both the House and the Senate held hearings Sept. 6 on how "carried interest" should be taxed. At stake is whether the carried interest that a general partner receives as part of a partnership venture should be ultimately taxed as a capital gain (present law) or as ordinary income. A bill has been introduced in the House of Representatives that would treat it as ordinary income (HR 2834), and House Ways and Means Committee Chairman Charles Rangel (D-N.Y.) said during a hearing in early September that he hopes to draft a large tax bill that would combine a one-year patch for the Alternative Minimum Tax (AMT), another industry issue, with an array of other provisions, including an increase in the tax rate for carried interest.

NAA/NMHC will continue to oppose the measure, noting that changing the tax treatment of the ultimate payout to a general partner for sweat equity, expertise and risk taking would have an extremely adverse effect on how partnerships are financed, especially those involving affordable housing.

The Sept. 6 hearing produced little new information. House Democrats said they hope to vote on legislation modeled after HR 2834 this year. Senators on the Finance Committee are taking a much more cautious approach because of the complexity of the tax code, especially as it relates to partnerships. The issue was initially raised as a means of generating revenue to pay for an AMT patch, although Democrats continue to frame it as an attempt to correct a "loophole" and to create a fairer tax code.

A one-year AMT patch is estimated to cost $50 billion, but an Aug. 17 study by the University of Pennsylvania said the carried-interest proposal would raise only $2 billion to $3 billion a year.