For all of Percy's posts on the taxation of carried interest, click here.

I've now read a one-pager on the paper that has caused all of this ruckus about changing the tax treatment of carried interest, and I have a comment and question for its author, Victor Fleischer.

First, my comment: you obviously take good care of yourself, because this picture makes you like you are no more than Two and Twenty years old:


Photo: Vic Fleischer

I take better care of myself, however:


Photo: Percy Walker, shirtless

Second, my question:

Suppose for my next fund I, as general partner, issue myself a call option for, say, $10,000 with an exercise price of 20% of all capital contributions to the fund with an 8% escalator (taking into account the timing of contributions), exercisable at any time and from time to time after the final closing of the fund.  Suppose further that the option is issued before any investments are made and anyone even subscribes to the fund and that each investor to the fund agrees to the issuance and $10,000 valuation of my call option.  Suppose even further that my new fund has $1 billion in commitments (including my own $10 million commitment) and that all those commitments are ultimately contributed and used for investment purposes only (i.e., I charge no management fee and have no general expenses).  Now, how should all of the gains I realize on my exercised option be taxed?