After the 2008 financial crises, many asset classes experienced significant devaluation, and shipping vessels were not immune. Some private equity funds may attempt to achieve outsized returns by acquiring vessels at below-market prices, leasing them for several years, and disposing of them at a significant profit. While the U.S. federal income tax rules are extremely favorable with respect to income earned from the international operation of shipping vessels, and in some instances gain from the disposition of these vessels, private equity funds should still take caution to structure investments in a way that takes advantage of these rules.

The most appropriate investment structure often depends on the private equity fund's investor base, which frequently includes pension funds. According to a 2014 report by State Street, approximately 77% of pension fund managers expected their institutions' investment risk appetite to increase over the next three years, and 60% anticipated increasing their allocations to private equity funds. With the growing importance of pension fund investors in mind, this article discusses U.S. federal income tax rules applicable to private equity investments in shipping vessels and identifies certain points that private equity funds should consider when structuring these investments.

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