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Three Key Provisions in IRS’ Final Carried Interest Rules

In January, the IRS released final rules on Section 1061 of the Internal Revenue Code. It was changed under the Tax Cuts and Jobs Act to require carried interest to be held at least three years, instead of one year as under prior law, to be taxed under preferable long-term capital gains tax rates instead of ordinary income rates.

In exploring several parts of the rules that are vital to understanding whether Section 1061 applies to a partnership interest, Bracewell’s Steven J. Lorch recently told Law360 that this rule will permit employees of fund managers to benefit from the capital interest exception if they invest in the fund, even if the fund makes or guarantees a loan to them, provided that they remain personally obligated to pay back the loan.

“The rule recognizes the common commercial practice of fund managers making loans to their employees to fund capital contributions, but requires an employee to keep skin in the game if they want to avoid the three-year holding period,” he said.

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