Alternate Title
Carried Interest: Recent Tax Holding Envisions Need For New Legislation
Keywords
carried interst, tax law
Abstract
In the financial world, carried interest represents the share of the profits of a private equity fund allocated to its manager which is disproportionate when compared to the manager’s relative capital contribution. On May 3, 2023 the Tax Court issued its memorandum opinion in ES NPA Holding, LLC v. Commissioner. The decision quickly became popularized as providing reassurance to sponsors of private equity funds that they will rarely, if ever, realize income as a result of the issuance of a profits/carried interest (the so-called front-end issue for carried interest). The so-called back-end issue is how the income arising from a carried interest is taxed when the profits are realized. This article describes carried interest’s so-called front-end history from the 1970s, noting the Treasury’s, scholars’, and courts’ recognition of an unresolved reciprocal relationship between the front-end and back-end issues, that being that the receipt of a profits interest is a type of deferred compensation. Most of the proposed carried interest legislation and scholarship recognized this. The article then asks whether the tax court’s recent decision has settled doctrine with respect to the front-end taxation of carried interest. It concludes that cryptic messages in the Tax Court’s opinion indicates that it did not and that the opinion hiddenly asks for Congress to resolve the reciprocity.
Recommended Citation
Patrick Lucas, Carried Interest: Recent Tax Holding Envisions Need For New Legislation, 19 FIU L. Rev. 229 (2025), https://doi.org/10.25148/lawrev.19.1.8.
