As a follow-up to our recent post regarding the proposals to tax carried interest as ordinary income, there is a significant tax planning opportunity for service partners (partners actively providing services) who have inter-partner loans. Our discussion covers President Obama’s American Jobs Act of 2011 and the bill introduced by Rep. Sander Levin (D-MI) on February 14, 2011.
Under both proposals, capital gain treatment remains in place for gains attributable to cash or property contributed by service partners in an “Investment Partnership” (more than 50% of the capital is contributed by passive investors).
The problem arises when the service partner’s capital contribution is provided by a loan (recourse or nonrecourse) made or guaranteed (directly or indirectly) by the partnership, another partner or a related party. In these cases, any attributed gain from this capital contribution is taxed as ordinary income.
The planning opportunity to repay these loans or refinance them with a qualified loan is different under the two proposals. Under the Obama bill, the loan needs to be repaid by January 1, 2013. Under the Levin bill, the loan needs to be repaid by date of enactment of the legislation.
Three significant issues to be aware of:
IRS Circular 230 Disclosure
To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.
Discuss your needs with us by clicking the link below.Schedule an Appointment
© 2022. All right reserved.