Debate on Carried Interest: A Response to the Defense of Eliminating Capital Gains Treatment for Carried Interest

We recently published an article demonstrating that the current tax treatment of carried interests, under which some partnership distributions to the holders of those interests are characterized as capital gains, is proper as a matter of good tax policy. We contended that the widespread antagonism to that tax treatment was wrong and based on a failure to account for the nature of a partnership and the proper characterization of partnership distributions for federal tax purposes. We refer to that article as Fallacious Objections. Calvin H. Johnson has written an article in response (see above), which we refer to as the Erroneous Defense article. In that article, Johnson does not dispute that current tax law treats the distributions in question as capital gains, and he graciously acknowledges that Fallacious Objections provides a fair description of the rationale for the current law. However, Johnson maintains that the current treatment offends good tax policy and should be changed. As one might expect, we disagree and will seek to show in this article that Johnson\u27s thesis does not withstand scrutiny. Before discussing the Erroneous Defense article, we briefly describe what constitutes carried interest and the basis of our contention that the current tax treatment of carried interests is consistent with tax policy. The support for our position is more fully set forth in Fallacious Objections