LTCG on profits interest in LP

Taxpayer has been a high-level employee at Big Tech, Inc. for several years. In 2017 a private equity firm invested a lot of money in Big Tech, Inc., and created a limited partnership - Big Tech, LP.

Taxpayer was awarded profit interest in the LP during 2017 and started getting K1s in addition to his W2 from Big Tech, Inc. Additional grants were awarded during 2020. In 2021, the private equity firm sold Big Tech, Inc. and taxpayer rec'd millions.

Taxpayer was told he gets LTCG treatment on the entire gain from the sale of his interest in LP but Sec 1061 talks about a 3 year holding period. I've read the exceptions under 1061(c)(4) and I don't think any of these apply. There were definitely high-powered advisors all around this deal so if there's a loophole I'm sure they got it. Any advice on this one?

Taxpayer has been a high-level employee at Big Tech, Inc. for several years. In 2017 a private equity firm invested a lot of money in Big Tech, Inc., and created a limited partnership - Big Tech, LP.

Taxpayer was awarded profit interest in the LP during 2017 and started getting K1s in addition to his W2 from Big Tech, Inc. Additional grants were awarded during 2020. In 2021, the private equity firm sold Big Tech, Inc. and taxpayer rec'd millions.

Taxpayer was told he gets LTCG treatment on the entire gain from the sale of his interest in LP but Sec 1061 talks about a 3 year holding period. I've read the exceptions under 1061(c)(4) and I don't think any of these apply. There were definitely high-powered advisors all around this deal so if there's a loophole I'm sure they got it. Any advice on this one?

Interestingly… I wouldn’t have thought of any of this. It’s LTCG without a doubt. (But now you have me thinking) he owns the rights to a revenue stream. He sold it. Just like a CPA selling his client list.

I don’t see how this is NOT LTCG. I assume he has no basis. His taxable income on his K1 each year was paid to him….

Taxpayer has been a high-level employee at Big Tech, Inc. for several years. In 2017 a private equity firm invested a lot of money in Big Tech, Inc., and created a limited partnership - Big Tech, LP.

Taxpayer was awarded profit interest in the LP during 2017 and started getting K1s in addition to his W2 from Big Tech, Inc. Additional grants were awarded during 2020. In 2021, the private equity firm sold Big Tech, Inc. and taxpayer rec'd millions.

Taxpayer was told he gets LTCG treatment on the entire gain from the sale of his interest in LP but Sec 1061 talks about a 3 year holding period. I've read the exceptions under 1061(c)(4) and I don't think any of these apply. There were definitely high-powered advisors all around this deal so if there's a loophole I'm sure they got it. Any advice on this one?

Interestingly… I wouldn’t have thought of any of this. It’s LTCG without a doubt. (But now you have me thinking) he owns the rights to a revenue stream. He sold it. Just like a CPA selling his client list.

I work with financial advisors. When they sell their book they are selling nothing but the rights to the revenue. It is capital gain.

I don’t see how this is NOT LTCG. I assume he has no basis. His taxable income on his K1 each year was paid to him….

The three-year holding period requirement is only for specific investments. Does your client fall into one of the applicable categories?

The three-year holding period requirement is only for specific investments. Does your client fall into one of the applicable categories?

Ahhh... thank you!

It sounds like the LP did not conduct business. If so, then the 3 year rule does not apply.