In a four-part guest series, Arthur H. Kohn, partner at Cleary Gottlieb, along with Andrew L. Oringer and Steven W. Rabitz, partners at Dechert, summarize the principal U.S. federal income tax and related design considerations associated with carried interest arrangements for individuals employed by or otherwise providing services to sponsors of private investment funds. This second article discusses various factors related to profits interests in a tax partnership, including elections under Section 83(b) of the Internal Revenue Code of 1986; fee-waiver provisions; and tax treatment on the repurchase or disposition of profits interests or the payment in liquidation of profits interests. The first article provided background on carried interest arrangements and examined relevant analytical considerations, including the statutory scheme; judicial background; proposed regulations; applicable revenue procedures; and capital shifts and book-ups. The third and fourth articles will review additional practical and design considerations. For more from Oringer, see our three-part series “How Can Private Fund Managers Accept ERISA Money Above the 25 Percent Threshold While Avoiding ERISA’s More Onerous Prohibited Transaction Provisions?”: Part One (May 14, 2010); Part Two (May 21, 2010); and Part Three (Jun. 18, 2010).