In the tax reform roadmap he released yesterday, House Ways & Means Committee Chair Dave Camp (R-MI) targeted the trillion dollar private equity industry.  Not only did he propose to tax the compensation of private equity managers at ordinary rates rather than lower capital gains rates, he also called the industry out. The official description of Camp’s plan asserts:

A partnership (e.g., a private equity fund) that is in the business of raising capital, investing in other businesses, developing such businesses, and ultimately selling them, is in the trade or business of selling businesses. For the tax law to be applied consistently, the profits derived by such an investment partnership and paid to its managing partners through management fees and a profits interest in the partnership (generally referred to as a carried interest), should be treated as ordinary income.

Thus, Camp deemed the share of a fund’s profits allocated to the manager to be ordinary income.  He stopped short of defining the remaining profits as ordinary income, presumably to protect the other partners (typically, not-for-profit institutions and foreign investors) and to avoid tricky policy questions. The consequences of this view go far beyond carried interest. For instance, treating a private equity fund as a business  could apply for other purposes of the tax law.  One example:  tomorrow, the U.S. Supreme Court will review a request that it consider a pension case called Sun Capital Partners v. New England Teamsters & Trucking, a dispute that may also turn on whether private equity firms are, in Camp’s words “in the business of selling businesses.” Camp’s vision is bold—and Congress (or the IRS) should explore it.