Carried Interest Capital Interest Exception

§ 1061. Partnership interests held in connection with performance of services(a) In generalIf one or more applicable partnership interests are held by a taxpayer at any time during the taxable year, the excess (if any) of—(1) the taxpayer’s net long-term capital gain with respect to such interests for such taxable year, over (2) the taxpayer’s net long-term capital gain with respect to such interests for such taxable year computed by applying paragraphs (3) and (4) of sections 11 So in original. Probably should be “section”. 1222 by substituting “3 years” for “1 year”, shall be treated as short-term capital gain, notwithstanding section 83 or any election in effect under section 83(b). (b) Special ruleTo the extent provided by the Secretary, subsection (a) shall not apply to income or gain attributable to any asset not held for portfolio investment on behalf of third party investors. (c) Applicable partnership interestFor purposes of this section—(1) In generalExcept as provided in this paragraph or paragraph (4), the term “applicable partnership interest” means any interest in a partnership which, directly or indirectly, is transferred to (or is held by) the taxpayer in connection with the performance of substantial services by the taxpayer, or any other related person, in any applicable trade or business. The previous sentence shall not apply to an interest held by a person who is employed by another entity that is conducting a trade or business (other than an applicable trade or business) and only provides services to such other entity. (2) Applicable trade or businessThe term “applicable trade or business” means any activity conducted on a regular, continuous, and substantial basis which, regardless of whether the activity is conducted in one or more entities, consists, in whole or in part, of—(A) raising or returning capital, and (B) either—(i) investing in (or disposing of) specified assets (or identifying specified assets for such investing or disposition), or (ii) developing specified assets. (3) Specified assetThe term “specified asset” means securities (as defined in section 475(c)(2) without regard to the last sentence thereof), commodities (as defined in section 475(e)(2)), real estate held for rental or investment, cash or cash equivalents, options or derivative contracts with respect to any of the foregoing, and an interest in a partnership to the extent of the partnership’s proportionate interest in any of the foregoing. (4) ExceptionsThe term “applicable partnership interest” shall not include—(A) any interest in a partnership directly or indirectly held by a corporation, or (B) any capital interest in the partnership which provides the taxpayer with a right to share in partnership capital commensurate with—(i) the amount of capital contributed (determined at the time of receipt of such partnership interest), or