IRS Carried Interest Regulations: Significant Tax Challenges and Planning Opportunities
Course Details
- smart_display Format
On-Demand
- signal_cellular_alt Difficulty Level
Intermediate
- work Practice Area
Tax Law
- event Date
Wednesday, April 23, 2025
- schedule Time
1:00 p.m. ET./10:00 a.m. PT
- timer Program Length
90 minutes
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This 90-minute webinar is eligible in most states for 1.5 CLE credits.
This CLE/CPE course will guide tax counsel and advisers on the IRS final regulations, the tax treatment of carried interest, and available planning opportunities. The panel will discuss the application of Sec. 1061, modifications to the capital interest exception, applicable partnership interests (API) dispositions, and other significant provisions. The panel will also discuss Secs. 1231 and 1256 property, implications of related party transactions, and planning techniques to ensure favorable capital gains treatment.
Ms. Cummins joins us from Proskauer where she was an associate in the firm’s tax department and a member of its private funds group. Her work centers on private investment funds and the tax concerns faced by both sponsors and investors in private equity funds. Ms. Cummins has helped to negotiate buy-side and sell-side secondaries transactions; planned and structured continuation funds and other sponsor-led liquidity events; and assisted sponsors with fund structuring concerns involving domestic and international investments. She was selected to be a Protégée for Proskauer’s Women Sponsorship Program, an initiative for high performing midlevel lawyers that champions emerging leaders. Ms. Cummins previously served as co-chair of the Firm’s LGBTQ Affinity Group, and received Proskauer’s Golden Gavel Award for excellence in pro bono work in 2021.
Mr. Cox is a partner within Nixon Peabody’s M&A and Corporate Transactions practice group and member of the Tax team. He focuses on various tax aspects facing domestic and international companies and provides significant experience in areas of capital markets, reorganizations, real estate, and private equity matters.
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 private equity, and real estate professionals.
There is controversy over carried interest because the tax rules allow 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 identify interests subject to IRC 1061 for tax planning purposes.
The IRS and the Treasury, on January 7, 2021, issued final regulations applicable to Section 1061 with significant changes for recharacterizing certain capital gain in connection with profits interests. The final rules included revisions to (1) the capital interest gains and losses and exceptions, (2) gains on the sale of API and distributed API property, and (3) transfers to related parties. The final regulations eliminate the transition rule that previously allowed a partnership to elect not to consider all long-term capital gains and losses recognized from the disposition of all assets held by the partnership for purposes of the recharacterization calculation. Tax counsel and advisers must identify critical issues stemming from these regulations and plan accordingly.
President Trump has stated, leading up to the 2025 tax reform discussions, that he wants to close the “carried interest loophole,” which suggests that it is possible that further restrictions may be imposed.
Listen as our panel discusses the requirements of IRC 1061, determining API subject to the new holding requirements, key planning issues for 1231 properties, and tax planning techniques to maintain favorable tax treatment of carried interest.
- Overview of the requirements for obtaining capital gains treatment under IRC 1061
- Impact of IRS final regulations
- Determining API and "applicable trade or business"
- Applicability of IRC 1061 to 1231 property
- Planning ideas for avoiding IRC 1061 three-year holding period
- Best practices for compensation arrangements in light of new holding requirements under IRC 1061
The panel will review these and other noteworthy issues:
- Treatment of carried interest and performance of services under IRC 1061
- Understanding critical provisions of the IRS final regulations
- Available tax planning techniques and strategies for partnerships for more favorable tax treatment
- Determining partnership interest that is API subject to IRC Section 1061 holding requirements
- Understanding key planning issues regarding the applicability of IRC 1061 to 1231 and 1256 property
- Potential planning opportunities presented by special allocations, transfers to unrelated parties, capital contributions, distributions, and lending transactions
- Best practices in ensuring favorable tax treatment in compensation arrangements involving carried interest
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