Carried Interest Rules for Investment Funds: Final Regs, Planning Opportunities, and Pitfalls

November 22, 2022 at 1:00pm2:30pm

Investment fund managers often participate in a portion of an investment fund's profits through a "carried interest" structured as a partnership interest in the investment fund. For partnership interests, the U.S. federal income tax treatment of carried interest is based on the character of the income earned by the fund. For fund managers, IRC 1061 may increase the holding period required for long-term capital gain treatment from one year to three years.

On Jan. 7, 2021, the IRS and the Department of the Treasury released final regulations that limit certain planning opportunities and include new calculation methodologies and partnership-level reporting requirements. Still, several techniques remain available to preserve long-term capital gains treatment for investment fund managers. Planning could include alterations to the overall business deal, such as restricting the types of gains in which the carried interest will share or permitting the fund manager to waive the right to participate in gains from certain investments but be made whole from other fund income and gains. Counsel should consider structural adjustments to how an investment is made and the form of an exit.

Jonathan Stein and Leah Segal will lead a discussion examining the new three-year holding period requirement for carried interests under IRC 1061 and explore the planning opportunities that may be available for private equity and hedge fund managers to preserve long-term capital gains treatment based on a one-year holding period rather than the three years outlined in 1061.