A Chance to End a Billion-Dollar Tax Break for Private Equity
In part, this is because it would not be a simple win. The IRS would have to make the claim either through a new position or rules. Private equity firms would no doubt contest this, meaning litigation. And let's face it, the government has barely been open for business as of late, and is not up to fighting what would be a titanic battle with some of the richest people on the planet.
Another of those Tax Notes articles was more favorable to private equity's case, calling this decision limited to the "rip, strip and flip" type of private equity investing. It may be that the firms can reorganize their investments to be more passive and exclude management fees and other attributes that make them look like a trade or business.
(Read more: Why private equity loves 'FroYo')
There are two unusual twists here. First, it was a private equity firm that created this opening through its aggressive actions. Sun was trying to discard Scott's pension liabilities through the bankruptcy process, something it had previously been accused of in the bankruptcy of Friendly's Ice Cream. By trying to save a measly $4.5 million, Sun Capital may cost the industry billions.
Second, it may now be that this battle to tax carried interest is not won or lost in the halls of Congress over high-minded concepts of fairness or equity, but rather in the halls of the IRS by applying common sense presumptions that existed all along.
Washington, it's your move.
—By Steven M. Davidoff of The New York Times. Davidoff is a professor at the Michael E. Moritz College of Law at Ohio State University and the author of "Gods at War: Shotgun Takeovers, Government by Deal and the Private Equity Implosion." E-mail: email@example.com | Twitter: @StevenDavidoff