Forthcoming Regulations to Close "S Corporation" Loophole Under New Carried Interest Rules

Section 1061 of the Tax Cuts and Jobs Act imposes a new three-year holding period for gains derived by a partnership that are passed through to the holder of a carried interest to qualify as long-term gains. This change is effective for any allocations of income or sales of carried interests on or after January 1, 2018, and it applies to newly-granted carried interests and existing carried interests alike. Further, Section 1061(c)(4)(A) provides that any interest in a partnership directly or indirectly held by a corporation is not an “applicable partnership interest” for purposes of section 1061. In Notice 2018-18, the IRS announced their intent that forthcoming regulations will provide the term “corporation” will not include an S Corporation.