Section 1061 of the Internal Revenue Code generally recharacterizes long-term capital gains attributable to certain carried interests (“applicable partnership interests” or “APIs”) as short-term capital gains, unless an extended, three-year holding period is satisfied. The IRS released proposed regulations on July 31, 2020 regarding the application of Section 1061 (which we covered in a previous Alert). On January 7, 2021, the IRS released final regulations that included some significant changes from the proposed regulations.
These final regulations will have a far-reaching impact on many private equity and other investment funds and partnerships that issue carried (profits) interests to employees and other service providers. The Alert can be found here.