The tax status of so-called “carried interests,” held by private equity fund sponsors (and benefitting, in particular, the individual managers of those sponsors) is the subject of today’s column. A decision by the U.S. Court of Appeals for the First Circuit holding that a private equity fund was engaged in a trade or business for purposes of the withdrawal liability provisions of ERISA (Employee Retirement Income Security Act) has caused considerable comment on the issue of whether a private equity fund might also be held to be in a trade or business (and not just a passive investor) for purposes of capital gains tax treatment on the sale of its portfolio companies. Proposed federal income tax legislation, beginning in 2007 and continuing into 2013, also has raised concern as to the status of capital gains tax treatment for holders of carried interests. The following discussion addresses both of these developments.
The Sun Capital Case
In a multiemployer pension plan withdrawal liability case, Sun Capital Partners III v. New Eng. Teamsters & Trucking Indus. Pension Fund, 724 F.3d 129 (1st Cir. 2013), the First Circuit held that a private equity fund could be found liable for the liability of one of its portfolio companies.1 In doing so it reversed the district court, remanding as to the issue of “common control” for the equity fund involved in its decision. The First Circuit’s decision is the subject of a petition for a writ of certiorari filed by Sun Capital with the U.S. Supreme Court Nov. 21, 2013.
