Carried Interest Tax Proposal Threatens Charitable Giving

Carried Interest Tax Proposal Threatens Charitable Giving

Oct 28, 2021 Elizabeth McGuigan

Update Nov. 5, 2021: The section that contained the damaging carried interest provision has been removed from draft legislation. Philanthropy Roundtable has been working diligently to point out the unintended consequences of how carried interest would be taxed, and we are hopeful the language will not reemerge in future legislation.

Last month, the House Ways and Means Committee marked up the Build Back Better Act to include a provision modifying how carried interest is treated under the tax code. Carried interest is, very generally, a share of the profits in a partnership paid to its manager. While the committee stopped short of taxing all carried interest as ordinary income, the restrictions included in the bill pose a direct threat to philanthropic givers and the charitable sector as a whole. Apart from the negative impact of tax increases in general, this provision would impose a substantial tax on certain partnership interests even when a charitable donor transfers those assets to charity. 

Philanthropy Roundtable has published a fact sheet on the complex tax change put forward in the bill that outlines what has been proposed and how this would impact the charitable sector. 

Current law is clear that gifts, whether made to a charity or otherwise, generally do not result in gain recognition to the donor, even if the property has substantially appreciated in value.  That has been a long-standing principle in the tax code and is sound policy: a gratuitous transfer should not be treated as a realization event because the donor, having parted ways with the asset, has realized no income on which he can be taxed.  

However, as currently drafted, the provision would apply to gratuitous transfers of applicable partnership interests, including (but not limited to) gifts to charity.  Thus, even where a donor divests himself entirely of an appreciated applicable partnership interest as part of a charitable donation, he could still be required to pay a substantial income tax.  This will make transferring applicable partnership interests to charity basically unfeasible.

We believe Congress supports charity and does not intend to apply this tax on philanthropy. Therefore, we respectfully request that Congress draft a legislative fix if this proposal advances that will protect charitable giving.