To embed, copy and paste the code into your website or blog: On Jan. 19, 2021, the Internal Revenue Service and the Treasury Department published final regulations on the Section 1061 “carried interest” rules (T.D. 9945). The final regulations generally adopt proposed regulations issued in July 2020 (please see our alert from Aug. 18, 2020) but make significant changes to (i) the exception for capital interests, (ii) the look-through rule that applies to certain dispositions of partnership interests and (iii) the rule for non-recognition transfers to certain related persons. While the new rules generally are taxpayer-favorable, they are not without uncertainty. Background A carried interest is an interest in partnership profits that is transferred to a service provider, such as a fund manager, in exchange for investment- and management-related services. Section 1061 extends the applicable long-term capital gain holding period for an “applicable partnership interest” (API) from one year to three years. An API is a partnership interest, including a profits interest, held or transferred in connection with the performance of “substantial services” by the taxpayer or a related person in an “applicable trade or business.” An applicable trade or business generally includes raising or returning capital and either investing in or disposing of specified assets (including securities, commodities, certain rental or investment-related real estate, and certain partnership interests) or developing specified assets. Section 1061 does not apply to capital interests, partnership interests held by employees of entities that are not engaged in an applicable trade or business and APIs acquired by certain bona fide purchasers.