IRS Final Carried Interest Regulations: Significant Tax Rule Changes and Planning Opportunities

Recording of a 90-minute premium CLE/CPE video webinar with Q&A

Conducted on Wednesday, April 7, 2021

Recorded event now available

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Course Materials

This CLE/CPE course will guide tax counsel and advisers on the IRS final regulations, the tax treatment of carried interest, and available planning opportunities. The panel will discuss the application of Sec. 1061, modifications to the capital interest exception, applicable partnership interests (API) dispositions, and other significant provisions. The panel will also discuss Sec. 1231 property, implications of related party transactions, and planning techniques to ensure favorable capital gains treatment.

Description

IRC 1061 increases the holding period required for long-term capital gains treatment from more than one year to more than three years. The three-year holding period's impact could be burdensome to hedge funds, private equity, and real estate professionals.

There is controversy over carried interest because the tax rules allow hedge funds, private equity, and real estate professionals to pay taxes on carried interest at the capital gains tax rate instead of the higher tax rate applicable to ordinary income. IRC 1061 increases the required long-term capital gains holding period for an "applicable partnership interest" to more than three years. Advisers must be able to identify interests subject to IRC 1061 for tax planning purposes.

On Jan. 7, 2021, the IRS and the Treasury issued final regulations applicable to Section 1061 with significant changes for recharacterizing certain capital gain in connection with profits interests. The final regulations include revisions to the (1) capital interest gains and losses and exceptions, (2) gains on the sale of API and distributed API property, and (3) transfers to related parties. The final regulations eliminate the transition rule that previously allowed a partnership to elect not to consider all long-term capital gains and losses recognized from the disposition of all assets held by the partnership for purposes of the recharacterization calculation. Tax counsel and advisers must identify key issues stemming from these regulations and plan accordingly.

Listen as our panel discusses the requirements of IRC 1061, determining applicable partnership interest subject to the new holding requirements, key planning issues for 1231 property, and tax planning techniques to maintain favorable tax treatment of carried interest.

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Outline

  1. Overview of the requirements of obtaining capital gains treatment under IRC 1061
  2. Impact of recent IRS final regulations
  3. Determining "applicable partnership interest" and "applicable trade or business"
  4. Applicability of IRC 1061 to 1231 property
  5. Planning ideas for avoiding IRC 1061 three-year holding period
  6. Best practices for compensation arrangements in light of new holding requirements under IRC 1061

Benefits

The panel will review these and other noteworthy issues:

  • Treatment of carried interest and performance of services under IRC 1061
  • Understanding key provisions of the IRS final regulations
  • Available tax planning techniques and strategies for partnerships for more favorable tax treatment
  • Determining partnership interest that is "applicable partnership interest" subject to IRC Section 1061 holding requirements
  • Understanding key planning issues regarding the applicability of IRC 1061 to 1231 property
  • Potential planning opportunities presented by special allocations, transfers to unrelated parties, capital contributions, and distributions
  • Best practices in ensuring favorable tax treatment in compensation arrangements involving carried interest

Faculty

Levine, Richard
Richard S. LeVine
Special Counsel
Withersworldwide

Mr. LeVine's practice focuses on cross-border estate, gift and income tax planning for owners of privately held...  |  Read More

Penman, Andrew
Andrew Penman
Partner
Fried Frank Harris Shriver & Jacobson

Mr. Penman's practice focuses on federal income taxation, with particular emphasis on partnership taxation and the...  |  Read More

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Strafford will process CLE credit for one person on each recording. CPE credit is not available on recordings. All formats include course handouts.

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