#IRC 1061 PROFESSIONAL#

To transmute a carried interest into a capital interest ( i.e., an interest commensurate with capital contributions made by the partner), an investment fund might distribute or loan cash or property to the fund professional, who in turn would recontribute the cash or property to the partnership as a capital contribution.

IRC В§ 1061(c)(4)(B) provides an exception to the three-year holding period rule for any interest that provides the right to share in partnership capital commensurate with the capital contributed to the partnership by the partner. Contribute capital in connection with the issuance of carried interests The planning opportunities discussed below may be available to taxpayers given the right facts and circumstances. While future corrective legislation and agency and legal interpretations may target IRC В§ 1061 planning, the statute in its current form provides opportunities for taxpayers work around the negative consequences of the three-year holding period. This article discusses several potential planning opportunities regarding the new three-year holding period requirement. In a recent article, we discussed the impact of the new IRC В§ 1061 and provided a summary of its rules. While IRC В§ 1061 doesnвЂ™t change the basic favorable treatment of carried interests (which are typically nontaxable at the time of issuance, can participate in the pass-through of long-term capital gains and be sold as a capital asset, in each case avoiding employment taxes), fund professionals will need to keep IRC В§ 1061 in mind when structuring compensation arrangements.

#IRC 1061 PROFESSIONAL#

Today, this same hedge fund professional would have short-term capital gains in both scenarios. The same hedge fundВ professional could sell his interest after a year and claim long-term capital gains treatment.

IRC В§ 1061 increases the holding period required for long-term capital gains treatment from more than one year to more than three years for an вЂњapplicable partnership interest.вЂќ Prior to the enactment of IRC В§ 1061, a carried interest might be issued on Tuesday, and if the partnership sold a capital asset with a long-term holding period on Wednesday, the holder could share in the pass-through of long-term capital gains on the sale. 1 Mnuchin prevailed with the enactment of IRC В§ 1061, despite President TrumpвЂ™s campaign promise to end the so called вЂњcarried interest loophole.вЂќ Reports indicate that during the negotiations of the 2017 Tax Cuts and Jobs Act, White House economic advisor Gary Cohn campaigned to end the benefit of carried interest by taxing all income from carried interests as ordinary income, while Treasury Secretary Steven Mnuchin urged keeping the prior tax treatment with new limits. Investment fund managers value compensation in the form ofВ carried interests, which allows them to beВ compensated for services with income that qualifies for long-term capital gains tax treatment.В Numerous efforts have been made during the past decade to cut back or eliminate the favorable tax treatment of carried interests.

Irc 1061