Final Section 1061 regulations provide significant changes

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January 2021

Overview

The Treasury and the IRS released on January 7 final regulations under Section 1061; the regulations were published in the Federal Register on January 19. Section 1061 generally increases the holding period to qualify for long-term capital gain treatment related to certain partnership interests (such as carried interests held by managers in the financial services industry), referred to as applicable partnership interests (APIs). When applicable, the greater than one-year holding period generally needed for long-term capital gain treatment is increased to a greater than three-year holding period. The increased holding period applies to both gains on the sale of APIs and on partnership gains allocated to partners holding APIs.

The final regulations retain most of the rules and definitions in the proposed regulations issued in July 2020, but make major changes in four key areas:  (1) the Capital Interest Exception; (2) capital Interests acquired with loan proceeds; (3) the lookthrough rule for certain API dispositions; and (4) transfers of APIs to Section 1061(d) related persons.

The takeaway

The final regulations provide a number of helpful changes from the proposed regulations. However, taxpayers will need to review their current and future structures and analyze the potential application of the final regulations, particularly with respect to loan arrangements to fund invested capital and the requirement for partnership agreements and books and records to clearly distinguish and track allocations and distributions with respect to APIs and with respect to capital interests eligible for the Capital Interest Exception.

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Audrey Ellis

Principal, M&A Tax, PwC US

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