26 U.S.C. § 1061 — Partnership interests held in connection with performance of services

(a) If a taxpayer^* holds one or more applicable partnership^* interests during a tax year, the excess of the taxpayer’s net long-term gain on those interests using the normal 1-year rule over the gain computed using 3 years instead of 1 is treated as short-term capital gain, despite section 83 or a section 83(b) election. (b) As regulations provide, this does not apply to income or gain from an asset not held for portfolio investment for third-party investors. (c)(1) An “applicable partnership interest” is a partnership interest transferred to or held by the taxpayer, directly or indirectly, for substantial services by the taxpayer or related person in an applicable trade or business^*. It excludes an interest held by someone employed by another entity in a non-applicable business who provides services only to that entity. (2) An “applicable trade or business” is a regular, continuous, substantial activity involving raising or returning capital and either investing in, disposing of, or identifying specified assets, or developing them. (3) A “specified asset” is securities under section 475(c)(2) without its last sentence, commodities under section 475(e)(2), rental or investment real estate, cash or equivalents, options or derivatives for those items, and a partnership interest to the extent of the partnership’s share of them. (4) The interest does not include an interest directly or indirectly held by a corporation^* or a capital interest giving a share matching contributed capital at receipt or the interest’s section 83-taxed value at receipt or vesting. (5) A “third-party investor” holds a partnership interest not connected to an applicable business and is not, and has not been, actively or through a related person providing the substantial services described in (1) for that partnership or business. (d)(1) If the taxpayer transfers an applicable interest directly or indirectly to a related person, the taxpayer includes short-term gain equal to the positive excess of allocable long-term gain from selling assets held no more than 3 years over gain already treated as short-term under (a). (2) A related person is a family member under section 318(a)(1) or someone who performed services in the current or preceding 3 calendar years in an applicable business in which or for which the taxpayer performed services. (e) The Secretary^* must require reports at the time and in the manner needed to carry out this section. (f) The Secretary must issue necessary or appropriate regulations and other guidance.