republic-os/legal/us/code/title-26/chapter-1/section-1061.md

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LegalText	26 U.S.C. § 1061	Partnership interests held in connection with performance of services	us	united_states_code	code_section	26	INTERNAL REVENUE CODE	1	NORMAL TAXES AND SURTAXES	1061	26 U.S.C. § 1061	current	119-100	2026-06-26	official	https://uscode.house.gov/download/releasepoints/us/pl/119/100/xml_usc26@119-100.zip	/us/usc/t26/s1061	data/legal/raw/us/code/title-26/usc26.xml	8553a84cae8e1afba172debe42adb0abda6e11a3a197bc078057b20367b4b080	a261f094809116f42a96648a3d5eee80fa010379d67412551c21dd5c900b27f4	331058bdcdd97e12543365847b41b39d3be151f54fa884e7e6c18bf935b187ff	2026-07-04	official	legal us-code

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

Text

(a) In general If 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 rule To 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 interest For purposes of this section—

(1) In general Except 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 business The 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 asset The 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) Exceptions The 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

(ii) the value of such interest subject to tax under section 83 upon the receipt or vesting of such interest.

(5) Third party investor The term “third party investor” means a person who—

(A) holds an interest in the partnership which does not constitute property held in connection with an applicable trade or business; and

(B) is not (and has not been) actively engaged, and is (and was) not related to a person so engaged, in (directly or indirectly) providing substantial services described in paragraph (1) for such partnership or any applicable trade or business.

(d) Transfer of applicable partnership interest to related person (1) In general If a taxpayer transfers any applicable partnership interest, directly or indirectly, to a person related to the taxpayer, the taxpayer shall include in gross income (as short term capital gain) the excess (if any) of—

(A) so much of the taxpayer’s long-term capital gains with respect to such interest for such taxable year attributable to the sale or exchange of any asset held for not more than 3 years as is allocable to such interest, over

(B) any amount treated as short term capital gain under subsection (a) with respect to the transfer of such interest.

(2) Related person For purposes of this paragraph, a person is related to the taxpayer if—

(A) the person is a member of the taxpayer’s family within the meaning of section 318(a)(1), or

(B) the person performed a service within the current calendar year or the preceding three calendar years in any applicable trade or business in which or for which the taxpayer performed a service.

(e) Reporting The Secretary shall require such reporting (at the time and in the manner prescribed by the Secretary) as is necessary to carry out the purposes of this section.

(f) Regulations The Secretary shall issue such regulations or other guidance as is necessary or appropriate to carry out the purposes of this section 22 So in original. Probably should be followed by a period.

(Added Pub. L. 115–97, title I, § 13309(a)(2), Dec. 22, 2017, 131 Stat. 2130.)

Notes

Editorial Notes

Prior ProvisionsA prior section 1061 was renumbered section 1063 of this title.

Statutory Notes and Related Subsidiaries

Effective DatePub. L. 115–97, title I, § 13309(c), Dec. 22, 2017, 131 Stat. 2131, provided that: “The amendments made by this section [enacting this section and renumbering former section 1061 of this title as section 1062] shall apply to taxable years beginning after December 31, 2017.”