Daily Tax Update - August 17, 2010: Carried Interest Proposal

The Daily Tax Update will be published on a periodic basis until Congress returns from its August recess on September 13th.

BROADLY DRAFTED CARRIED INTEREST LEGISLATIVE PROPOSAL EXTENDS BEYOND INVESTMENT MANAGERS TO CORPORATE JOINT VENTURES: The tax treatment of carried interests held by investment managers has been the target of proposed legislation since 2007 and is offered again as a revenue offset in the current tax extenders bill. The proposed legislation has grown steadily in breadth over the past three years. In its current form, the provision unexpectedly captures internal or external corporate joint ventures, even ventures conducting operating businesses.

  • There are three main tax effects of the proposed legislation for corporations with these joint venture structures:
    • conversion of capital gain into ordinary income, which would slow the absorption of capital loss carryovers,
    • deferral of operating losses to the extent the losses exceed the amount of income taken into account, and
    • recognition of income upon a disposition of an interest in a joint venture or a distribution of appreciated property with respect to such interest, where recognition of income would not otherwise arise (for example, a transfer of a joint venture interest in a section 332 or 351 transaction or the redemption or liquidation of a joint venture interest with appreciated property).
  • The most recent version of the proposed legislation is here.

Revenue Procedure 2010-30 (released today) describes the circumstances under which the Internal Revenue Service will not challenge a mortgage loan held by a real estate mortgage investment conduit (a “REMIC”) as other than a “qualified mortgage” on the grounds that the mortgage loan fails to be principally secured by an interest in real property for purposes of section 860G(a)(3)(A) of the Internal Revenue Code and § 1.860G-2(a)(8) of the Income Tax Regulations following a release of a lien on an interest in real property that secures the mortgage loan.

Revenue Procedure 2010-29 (released August 13) provides the domestic asset/liability percentages and domestic investment yields needed by foreign life insurance companies and foreign property and liability insurance companies to compute their minimum effectively connected net investment income under section 842(b) of the Internal Revenue Code for taxable years beginning after December 31, 2008.

As provided for in Treasury regulations, advice (if any) relating to federal taxes that is contained in this communication (including attachments) is not intended or written to be used, and cannot be used, for the purpose of (1) avoiding penalties under the Internal Revenue Code or (2) promoting, marketing or recommending to another party any plan or arrangement addressed herein.

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