It’s almost as if Treasury returned with new vigor after a year-end vacation, because last week, just a couple of days after Treasury issued final regulations under the business interest deduction limitations of §163(j), Treasury issued final regulations under the carried interest rules of §1061. At least the carried interest regulations are shorter – 168 pages of preamble and regulations vs. 178 pages under §163(j). The fast track of these §1061 regulations is rather remarkable, given that proposed regulations were proposed on August 14, 2020.

The new regulations do not make for easy late-night reading, However, let us call your attention to a couple of important changes in the final regulations. First, Treasury did a welcome about face with related-party non-taxable transfers, such as gifts. Instead of the potential income acceleration approach in the proposed regulations with respect to such a transfer, the final regulations provide for §1061 applicability only in the event of a related-party transfer where long-term capital gain is recognized. Second, instead of the holder of an applicable partnership interest not being eligible for the “capital interest exception” when the capital contribution is derived from a loan made by a partner or other “related party,” the final regulations change course and provide that a capital contribution made with such loan proceeds is eligible for the capital interest exception as long as the loan is recourse in nature. However, in a non-favorable non-development, unfortunately Treasury did not bite on the request that a one-off real estate partnership would be outside the clutches of §1061.