Document Type

Article

Publication Date

3-2026

Abstract

In 2008 professor Victor Fleischer published a famous article entitled “Two and Twenty: Taxing Partnership Profits in Private Equity Funds.” The article explained that: Private equity fund managers take a share of the profits of the partnership as the equity portion of their compensation. The tax rules for compensating general partners create a planning opportunity for managers who receive the industry standard “two and twenty” (a two percent management fee and twenty percent profits interest). By taking a portion of their pay in the form of partnership profits, fund managers defer income derived from their labor efforts and convert it from ordinary income into long-term capital gain. This quirk in the tax law allows some of the richest workers in the country to pay tax on their labor income at a low rate. Changes in the investment world — the growth of private equity funds, the adoption of portable alpha strategies by institutional investors, and aggressive tax planning — suggest that reconsideration of the partnership profits puzzle is overdue.

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Reprinted with the permission of Tax Analysts

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