The IRS issued final regulations on the taxation of carried interest under Section 1061 (Carried Interest Regulations) on January 7, 2021 – more than three years after Section 1061 was added to the Internal Revenue Code as part of the Tax Cuts and Jobs Act of 2017. Generally, Section 1061 and the Carried Interest Regulations provide that capital gains allocated under certain carried interest arrangements are only eligible for the favorable 20‑percent U.S. federal income tax rate if the underlying assets were held for more than three years at the time of sale. The Carried Interest Regulations are, on the whole, consistent with the manner in which most taxpayers have been applying Section 1061 since its enactment and with the carried interest regulations the IRS proposed in August 2020 (Proposed Regulations). There are a few key ways, however, that the Carried Interest Regulations diverge from both market practice and the Proposed Regulations. In a guest article, Davis Polk attorneys David H. Schnabel, Patrick E. Sigmon and Ethan R. Goldman provide an overview of key features, exceptions and issues for PE sponsors to understand in connection with the Carried Interest Regulations. See “How the Proposed Carried Interest Regulations Could Affect Fund Managers
” (Nov. 10, 2020).