Letter Opposing H.R. 2834

July 11, 2007

The Honorable Sander Levin
United States House of Representatives
Washington, DC 20515

Dear Representative Levin:

The U.S. Chamber of Commerce, the world's largest business federation representing more than three million businesses and organizations of every size, sector, and region, opposes H.R. 2834, a bill to recharacterize the tax treatment of carried interest as ordinary income.

H.R. 2834 would fundamentally change an area of tax law that has been common practice for decades. The treatment of carried interest has evolved through the application of the law, numerous tax court cases, revenue rulings, and regulations. The taxation of carried interest is not a new-found tax loophole but a long-standing part of the tax code.

The carried interest serves the vital role of aligning the incentives of the general partner (GP) with the financial investors of the project, reducing the risk to the investors. The carried interest is the sweat equity or human capital provided by the GP and involves real risk based on the outcome of the project. The GP portion of the carried interest is only paid after the investors have been repaid their principal and a prenegotiated rate of return often referred to as the hurdle rate. If the endeavor is unsuccessful or these requirements have not been met, the GP receives nothing and may be forced to return any carried interest received earlier. The carried interest is only subject to the lower 15-percent capital gains rate if the underlying asset has been held for more than one year.

Changes to the treatment of carried interest would affect the capital formation process for a range of industries that use the partnership structure including real estate, oil and gas, shopping centers, venture capital, and others in addition to all the companies, workers and pension funds who have benefited from the investments of private equity. The partnership structure promotes the entrepreneurial risk-taking and investment that is fundamental to innovation and new businesses in America. Congress should study and consider all the consequences for job creation and the economy before enacting such a sweeping change.

Partnership law is a very complex area of the tax code and is subject to numerous IRS rulings and procedures that have evolved to address the issues surrounding the treatment of carried interest. The partnership structure allows many entrepreneurs access to the capital vital to bringing their projects to fruition. For these reasons the Chamber opposes H.R. 2834 and urges Congress to carefully examine the issues surrounding this issue and not take a haphazard approach to this complicated and complex area of the tax code.

Sincerely,

R. Bruce Josten

Cc: Members of the Committee on Ways and Means