Waiver of Carried Interest Notice by General Partner

Summary

This form is a notice of waiver of carried interest that general partners may use to provide notice to private equity fund limited partners of the general partner's election to waive proceeds from the sale or disposition of fund assets under the terms of a fund's limited partnership agreement. This template contains practical guidance and drafting notes. General partners of private equity funds have long benefitted from the tax treatment of carried interest, as allocated and distributed according to funds' limited partnership agreements. Until recently, distributions of carried interest were taxed at the preferential "long term capital gains" rate, rather than at the higher rate applicable to ordinary income. Changes to I.R.C. Section 1061 in early 2021 however, dictated that only carried interest attributable to fund assets held for at least three years would be eligible to receive the long-term capital gains rate—other carried interest distributions would be taxed at the applicable ordinary income rate. In response to this change, funds may incorporate a carried interest waiver provision, which is structured to allow general partners to waive allocations of gains attributable to fund investments held for under three years, while receiving future allocations of gains from fund investments held for three years or longer. This letter is applicable to funds who provide for carried interest waivers in their governing documents (usually their limited partnership agreement or operating agreement) and notifies limited partners of an election by the general partner to waive allocations of gains in exchange for future gains. It is important to note that for limited partners, long term capital gain treatment is available to all proceeds of investments held for a year or more, so an election by the general partner may not necessarily have any detrimental tax consequences for limited partners receiving gains from the same assets. For additional information on I.R.C. Section 1061 and carried interest generally, see Carried Interests: Tax. Note that the preamble to proposed regulations under I.R.C. Section 1061 indicate that carried interest waivers may not be respected under substance over form principles, the economic substance doctrine and Treasury Regulations applicable to management fee waivers. See Preamble to Prop. Reg. Section 1.1061-1 (REG-107213-18), 85 FR 49754, so a careful review of the carried interest waiver provisions in the LPA is important.