In what scenario would GPs face a higher ordinary income tax rate?

General Partners (GPs) face a higher ordinary income tax rate primarily when they realize income in a manner that doesn't qualify for the more favorable capital gains tax treatment. In the context of private equity and funds, the scenario in which GPs would experience a higher ordinary income tax rate is typically linked to transactions that result in immediate income recognition rather than capital appreciation.

When Limited Partners (LPs) force an exit through a sale of assets, the resulting income can be treated as ordinary income for GPs, as it may involve fees or other forms of compensation that are recognized right away rather than from long-term capital gains. This income does not benefit from the capital gains tax advantages, thus leading to taxation at the ordinary income rates, which are generally higher.

While other scenarios involve some form of income or profit sharing, they may not trigger ordinary income tax rates in the same way, as they could still be classified under capital contributions, profit allocations, or other strategies that may qualify for capital gains tax treatment. Thus, the situation where an exit is forced typically creates a more immediate and realized income situation for GPs, leading to a higher tax rate.