IRS guidance expected soon to address perceived loophole in the new carried interest rules

Tax Hot Topics newsletter Treasury Secretary Steven Mnuchin recently told the Senate Finance Committee that he expects the IRS will issue guidance in the next few weeks that will prevent avoidance of the newly enacted rules covering carried interests.

Section 1061 applies to carried interests involving investment and real estate businesses and generally requires that the interest be held for more than three years in order for the gain on disposal to be treated as a long-term capital gain. The new provision includes various other details on the situations to which it applies.

Section 1061(c)(4)(A) provides that the new rules do not apply to “any interest in a partnership directly or indirectly held by a corporation.” Some taxpayers have questioned whether the statute’s reference to a corporation could include an S corporation, leading some to consider contributing affected partnership interests to an S corporation in order to avoid the three-year holding period requirement.

Any guidance the IRS issues would likely restrict the exception in Section 1061(c)(4)(A) to C corporations. If administrative guidance is not viable, there is a possibility that legislative technical corrections may address the issue.

Contact Grace Kim
Principal, Partnership Tax Technical Leader, Washington National Tax Office
T +1 202 521 1590

Bryan Keith
Managing Director, National Tax Standards Group, Washington National Tax Office
T +1 202 861 4116

Glenn Dance
Managing Director, National Tax Standards Group, Washington National Tax Office
T +1 703 637 2634

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