Tax Treatment of Carried Interest: New IRS Regs, Planning Strategies for Tax, Private Equity, and Real Estate Professionals

IRC Section 1061, Capital Contributions, Transfers to Unrelated Parties, Special Allocations, Section 1231 Property

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


Conducted on Thursday, August 27, 2020

Recorded event now available

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Program Materials

This CLE/CPE webinar will provide guidance to tax counsel and advisers on the current tax law's impact on the treatment of carried interest and available planning opportunities. The panel will discuss recent IRS proposed regulations, the application of Sec. 1061, 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 impact of the three-year holding period 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 July 31, 2020, the IRS published proposed regulations aimed at recharacterizing certain capital gain in connection with profits interests. It is imperative that tax counsel and advisers identify key issues stemming from these regulations and plan accordingly.

Tax counsel and advisers must also understand partnership interests that fall within the definition of profits interest under Rev. Proc. 93-27 or any exceptions, whether or not the partnership interest was issued in connection with the performance of substantial services in an applicable trade or business, and what partnership interests are not subject to IRC 1061. Also, advisers and counsel need to recognize any available planning mechanisms for avoiding the three-year holding period requirements to prevent unintended tax liability.

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 proposed 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
  • 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

Lehn, David
David M. Lehn

Partner
Withersworldwide

Mr. Lehn is a partner in the private client and tax team. He has extensive experience in federal and state income,...  |  Read More

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

Lovett, Brian
Brian T. Lovett, CPA, JD

Partner
Withum Smith+Brown

Mr. Lovett has extensive experience serving the tax needs of both public companies and closely-held businesses,...  |  Read More

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