IRS to bar S corporations from carried interest exception

Tax Hot Topics newsletter The IRS announced on March 1 (Notice 2018-18) that it intends to write regulations that would not allow partnership interests held through an S corporation to qualify for an exception to new carried interest rules on long-term capital gain treatment.

The Tax Cuts and Jobs Act created a new version of Section 1061 to require taxpayers who receive partnership interests in exchange for certain investment and real estate services (typically referred to as “carried interests”) to hold any associated assets for three years instead of one to receive long-term capital gains treatment. But 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 had already begun exploring whether holding a partnership through an S corporation would qualify them for this exception. Notice 2018-18 is meant to shut down this planning strategy.

For more information on Notice 2018-18, see Grant Thornton’s Tax Flash.

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

Jose Carrasco
Senior Manager, National Tax Standards Group, Washington National Tax Office
T +1 202 521 1511

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