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.