Carried Interest Rules for Investment Funds: Planning Opportunities and Pitfalls

This CLE course will examine the three-year holding period requirement for carried interests under IRC Sec. 1061 and discuss structuring techniques that can preserve long-term capital gains treatment for private equity and hedge fund managers.

Investment fund managers often participate in a portion of the 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 Sec. 1061 may increase the holding period required for long-term capital gain treatment from one year to three years.

IRS and Department of the Treasury regulations limit certain planning opportunities and include calculation methodologies and partnership-level reporting requirements. 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.

Listen as our panel examines the three-year holding period requirement for carried interests under IRC Sec. 1061 and discusses 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.