Section 1061(a)(2) requires a taxpayer to recalculate its net long-term capital gain by вЂњapplying paragraphs (3) and (4) of sections 1222 by substituting вЂ3 yearsвЂ™ for вЂ1 year.вЂ™вЂќ IRC В§ 1061(a)(2).IRC Sec. IRC В§ 1061(a) (flush language). If such calculation results in a lower amount of net long-term capital gain than the amount of net long-term capital gain realized utilizing the standard one-year holding period, the rule recharacterizes such difference as short-term capital gain. Internal Revenue Code (вЂњIRCвЂќ) В§ 1061(a). The trading strategy of the entity granting the profits interest does, however, have a substantial effect on the benefits offered, especially in light of the TCJA.Under the Tax Cuts and Jobs Act (вЂњTCJAвЂќ), a taxpayer holding an вЂњapplicable partnership interestвЂќ is required to recalculate any net long-term capital gain realized вЂњwith respect toвЂќ the вЂњapplicable partnership interestвЂќ by applying a three-year holding period (instead of the standard one-year holding period). Under new IRC В§1061, the general partner entity must have held its carry interest three years and the investments themselves must have been held for three years as well.

Any capital interest in the partnership which provides the partner with the right to share in capital commensurate with either (i) the amount of capital contributed (determined at the time of receipt of the interest), or (ii) the value of the interest subject to tax under IRC В§ 83 upon the receipt or vesting of the interest ( e., as compensation income). Any partnership interest directly or indirectly held by a corporation. Section 1061 does not apply to: IRC В§ 1061(c)(3).Section 1061 contains a number of exceptions. Whether a business is an applicable trade or business, вЂњspecified assetsвЂќ means (i) securities (as defined in IRC В§ 475(c)(2) without regard to the last sentence thereof), (ii) commodities (as defined in IRC В§ 475(e)(2)), (iii) real estate held for rental or investment, (iv) cash or cash equivalents, (v) options or derivative contracts with respect to any of the foregoing, and (vi) an interest in a partnership to the extent of the partnershipвЂ™s proportionate interest in any of the foregoing.

For purposes of this rule, a person is related to the partner if that person either (A) is a member of the partnerвЂ™s family (within the meaning of IRC В§ 318(a)(1)), or (B) performed a service within the current, or three preceding, calendar years in any applicable trade or business in which the partner also performed a service. IRC В§ 1061(c)(5).If the applicable partnership interest is transferred (directly or indirectly) to a вЂњrelated personвЂќ, the transferor is required to include in gross income as short-term capital gains the excess (if any) of the amount of the transferorвЂ™s long-term capital gains with respect to such interest that is attributable to the sale or exchange of any asset held for not more than three years that is allocable to that transferred interest, over the amount treated as short-term capital gain under IRC В§ 1061(a) relating to the transfer of that interest. For purposes of this exception, a third party investor means a person who (i) holds an interest in the partnership which does not constitute property held in connection with an applicable trade or business, and (ii) is not (and has not been) actively engaged, and is (and was) not related to a person so engaged, in (directly or indirectly) providing вЂњsubstantial servicesвЂќ for such partnership or any applicable trade or business. Any income or gain attributable to an asset not held for portfolio investment on behalf of third party investors.

Irc 1061