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Proposed Carried Interest Rules Sent to OIRA

Posted on Jan. 16, 2020

Proposed rules on the treatment of carried interests are under review at the Office of Management and Budget and could be released within weeks.

The proposed rules were received January 14, according to the website of the OMB’s Office of Information and Regulatory Affairs. The rules aren’t marked as being economically significant.

A carried interest is generally an interest in partnership profits that is received in exchange for services for some investment-related businesses. Under Rev. Proc. 93-27, 1993-2 C.B. 343, receiving profits-only interest in exchange for services isn’t treated as taxable compensation if specific criteria are met. Whoever holds the profits interest is treated as a partner and can get capital gains treatment if the partnership recognizes capital gains.

Carried interest has raised the ire of lawmakers in both parties over the years, and the Tax Cuts and Jobs Act attempted to rein in its use by adding section 1061, which created a new three-year holding period for those interests before they can receive long-term capital gains treatment.

However, there are several remaining questions practitioners want answered, such as how the three-year holding period rule applies when a carried interest has only been held for a year but the partnership sells a capital asset that has a three-year holding period.

The government typically punts on the issue of tiered partnerships in its rules, but an IRS official indicated that those types of partnership structures will be addressed in the proposed regulations.

 

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