ABA Tax Section Offers Comments on Proposed Carried Interest Regs

ABA Tax Section Offers Comments on Proposed Carried Interest Regs

American Bar Association Section of Taxation

The American Bar Association Section of Taxation has submitted comments on proposed carried interest regulations (<a href="/lr/resolve//2csfb">REG-107213-18</a>), recommending that the final regs not require that a partnership agreement clearly identify capital interest allocations separate and apart from allocations of applicable partnership interests (APIs). The tax section requests clarification that the cost of services provided by the API holder or a related person to the partnership covers not only fees (such as management fees) but also API allocations made for the benefit of another partner. As an alternative to making allocations based on relative capital account balances, section members believe a partnership should be able to satisfy the relative capital account requirement by making allocations based on invested capital, capital commitments, or a similar reasonable metric. Members also request clarification that partnership interests with interests in tracking or similar allocations can qualify for the capital interest exception, provided that all partners with economic interests in such arrangements are entitled to the same economic return on a particular pool of partnership assets. The tax section suggests creating a specific exception under <a href="/research/federal/usc26/1061#cqj6-0000012" resolve="/lr/resolve//cqj6#cqj6-0000012">section 1061(b)</a> that would apply in the case of family offices and other partnerships that do not hold assets for portfolio investment on behalf of third-party investors. Section members also recommend broadening the passthrough interest direct investment allocation rules to exempt enterprise value and similar assets from generating API gains and losses. The tax section proposes that <a href="/research/federal/usc26/1061#cqj6-0000014" resolve="/lr/resolve//cqj6#cqj6-0000014">section 1061(d)</a> not apply to transfers otherwise entitled to nonrecognition treatment under the tax code. Section members request clarification that items of long-term capital gain and loss attributable to non-section <a href="/research/federal/usc26/1222" resolve="/lr/resolve//cq39">1222</a> property are excluded from the calculation of the owner-taxpayer’s one-year and three-year disposition amount, and not just from the API one-year and three-year distributive share amount. The regs should also provide that the third-party purchaser exception applies to an API purchased directly, as well as an API purchased indirectly by an unrelated third-party. The tax section suggests adding an example to the regs illustrating or otherwise better explaining the importance of the API holder transition amount rules. Section members think the final regs should clarify that a distribution to a partner is not distributed API property to the extent that it is distributed regarding the portion of the partner’s interest qualifying for the capital interest exception. Members also request confirmation that partnerships can change their <a href="/research/federal/usc26/704#cpfs-0000006" resolve="/lr/resolve//cpfs#cpfs-0000006">section 704(c)</a> aggregation method to address <a href="/research/federal/usc26/1061" resolve="/lr/resolve//cqj6">section 1061</a> in a manner consistent with the regulations and that any such change would not violate the consistency rule.

The American Bar Association Section of Taxation has submitted comments on proposed carried interest regulations (REG-107213-18), recommending that the final regs not require that a partnership agreement clearly identify capital interest allocations separate and apart from allocations of applicable partnership interests.

The American Bar Association Section of Taxation has submitted comments on proposed carried interest regulations (REG-107213-18), recommending that the final regs not require that a partnership agreement clearly identify capital interest allocations separate and apart from allocations of applicable partnership interests (APIs). The tax section requests clarification that the cost of services provided by the API holder or a related person to the partnership covers not only fees (such as management fees) but also API allocations made for the benefit of another partner. As an alternative to making allocations based on relative capital account balances, section members believe a partnership should be able to satisfy the relative capital account requirement by making allocations based on invested capital, capital commitments, or a similar reasonable metric. Members also request clarification that partnership interests with interests in tracking or similar allocations can qualify for the capital interest exception, provided that all partners with economic interests in such arrangements are entitled to the same economic return on a particular pool of partnership assets. The tax section suggests creating a specific exception under section 1061(b) that would apply in the case of family offices and other partnerships that do not hold assets for portfolio investment on behalf of third-party investors. Section members also recommend broadening the passthrough interest direct investment allocation rules to exempt enterprise value and similar assets from generating API gains and losses. The tax section proposes that section 1061(d) not apply to transfers otherwise entitled to nonrecognition treatment under the tax code. Section members request clarification that items of long-term capital gain and loss attributable to non-section 1222 property are excluded from the calculation of the owner-taxpayer’s one-year and three-year disposition amount, and not just from the API one-year and three-year distributive share amount. The regs should also provide that the third-party purchaser exception applies to an API purchased directly, as well as an API purchased indirectly by an unrelated third-party. The tax section suggests adding an example to the regs illustrating or otherwise better explaining the importance of the API holder transition amount rules. Section members think the final regs should clarify that a distribution to a partner is not distributed API property to the extent that it is distributed regarding the portion of the partner’s interest qualifying for the capital interest exception. Members also request confirmation that partnerships can change their section 704(c) aggregation method to address section 1061 in a manner consistent with the regulations and that any such change would not violate the consistency rule.

Sec. 1061 Partnership interests held in connection with performance of services

Search Connectors

Retrieving Documents With a Tax Analysts’ Citation:

Field Restricted Searching:

ABA Tax Section Offers Comments on Proposed Carried Interest Regs