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Changes to U.S. Taxation of Carried Interest Dropped from Proposed Inflation Reduction Act of 2022

August 8, 2022

On Thursday, August 4, 2022, Senate Democrats announced that in order to obtain the support of Senator Kyrsten Sinema for the Inflation Reduction Act of 2022 (the “Act”), the Act will no longer include the previously proposed changes to the taxation of carried interest. We previously discussed those proposed changes here. Senator Sinema’s support is contingent on eliminating the carried interest provisions in favor of another revenue-raising proposal—an excise tax on stock buybacks. Although this will come as welcome news to fund managers, Senator Sinema released a statement yesterday expressing her support for a further negotiation on a separate bill regarding carried interest. However, any separate legislation this year would almost certainly require the Senate to meet the 60-vote threshold to avoid a filibuster; therefore, the prospects for any standalone legislation on the taxation of carried interest are uncertain.

O’Melveny will monitor further developments with respect to the Act, including other aspects of the Act that may be germane to our fund clients and their portfolio companies, any future legislation, and the tax treatment of carried interest generally. Please contact the attorneys listed on this Client Alert or your O’Melveny counsel for questions regarding the information discussed herein.

This memorandum is a summary for general information and discussion only and may be considered an advertisement for certain purposes. It is not a full analysis of the matters presented, may not be relied upon as legal advice, and does not purport to represent the views of our clients or the Firm. Alexander Anderson, an O’Melveny partner licensed to practice law in New York, Will S. Becker, an O’Melveny partner licensed to practice law in Texas, Luc Moritz, an O’Melveny partner licensed to practice law in California, and Billy Abbott, an O’Melveny counsel licensed to practice law in California and New York contributed to the content of this newsletter. The views expressed in this newsletter are the views of the authors except as otherwise noted.

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