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Summary:
General partners in most private equity and hedge funds are compensated in two ways. First, to the extent that they contribute their capital in the funds, they share in the appreciation of the assets. Second, they charge the limited partners two kinds of annual fees: a percentage of total fund assets (usually in the 1% to 2% range), and a percentage of the fund's earnings (usually 15% to 25%, once specified benchmarks are met). The latter performance fee is called "carried interest" and is treated, or characterized, as capital gains under current tax rules. H.R. 2834, introduced by Representative Levin on June 22, 2007, would characterize carried interest as ordinary income. This report provides background on the issues related to the debate concerning the characterization of carried interest. It will be updated as legislative developments warrant.
