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Abstract: 

There continues to be much public debate about the fairness of carried interest. This article describes how investment partnerships typically structure carried interest arrangements between passive investors and the general partner or managing member of such partnerships. The author first describes the cash flows and economic arrangement of a carried interest relationship in detail; he then explains the taxation of such an arrangement under current federal income tax law.

Keywords: carried interest; private equity; hedge fund; partnership tax; incentive fee

Affiliations:  1: Kramer Levin Naftalis & Frankel LLP.