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25 Mar 2009

New Legislation Proposed, Raising Hedge Fund Issues

Carried interest legislation is being considered at the federal, state and local level, raising significant local and international tax issues.

Carried interests, which form an essential element of business in almost every section of the U.S. economy (real estate, private equity, hedge funds and health care), have been subject to significant legislative proposals over the last two years.

Most investment funds (hedge and equity) have a general partner (LLC or LP) which receives a management fee (2%) and a carried interest equal to a percentage (e.g., 20%) of economic income including realized capital gains.

Proposals to reform the taxation of carried interest started in January of 2007 with legislation introduced by Senator Levin (D-MI) that would recharacterize "carried interest" income as ordinary income.

During 2008 New York State proposed and New York City introduced legislation that would change the way carried interest is taxed.

President Obama's Budget Blueprint released on February 26, 2009 includes a line item related to taxing carried interest as ordinary income.

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