--- kind: "range" citation: "26 C.F.R. §§ 1.1061-2–1.1061-6" title: "26" from: "1.1061-2" to: "1.1061-6" count: 5 url: "https://uscodex.org/cfr/26/1.1061-2..1.1061-6" --- # §1.1061-2. Applicable partnership interests and applicable trades or businesses. - (a) **API rules and examples—** - (1) **Rules—** - (i) **An API remains an API.** Once a partnership interest qualifies as an API, the partnership interest remains an API unless and until the requirements of one of the exceptions to qualification of a partnership interest as an API, set forth in [§ 1.1061-3](/cfr/26/1.1061-3.md), are satisfied. - (ii) **Application of section 1061 to Unrealized API Gains and Losses.** Unrealized API Gains and Losses are API Gains and Losses subject to [section 1061](/cfr/26/1061.md) when the gains and losses are realized and recognized. Unrealized API Gains and Losses do not lose their character as such until they are recognized. - (iii) **API Gains and Losses retain their character.** API Gains and Losses retain their character as API Gains and Losses as they are allocated from one Passthrough Entity to another Passthrough Entity and then to the Owner Taxpayer. - (iv) **Substantial services by an Owner Taxpayer, Passthrough Taxpayer, or any Related Person.** If an interest in a partnership is transferred to or held by an Owner Taxpayer, Passthrough Taxpayer, or any Related Person in connection with the performance of services, the Owner Taxpayer, the Passthrough Taxpayer, or the Related Person is presumed to have provided substantial services for purposes of [section 1061](/cfr/26/1061.md). - (v) **Grantor trusts and entities disregarded as separate from their owners.** A trust wholly described in [subpart E](/cfr/26/subpartE.md), part I, subchapter J, chapter 1 of the Internal Revenue Code (that is, a grantor trust), a qualified subchapter S subsidiary described in [section 1361(b)(3)](/cfr/26/1361.md?p=b-3), and an entity with a single owner that is treated as disregarded as an entity separate from its owner under any provision of the Internal Revenue Code or any part of [26 CFR](/cfr/26.md) (including [§ 301.7701-3](/cfr/26/301.7701-3.md) of this chapter) are disregarded for purposes of the [Section 1061](/cfr/26/1061.md) Regulations. - (2) **Examples.** The following examples illustrate the provisions of this [paragraph (a)](#a). - (i) **Example 1: API.** - (A) **A is the general partner of PRS, a partnership, and provides services to PRS.** A is engaged in an ATB as defined in [§ 1.1061-1(a)](/cfr/26/1.1061-1.md?p=a). PRS transfers a PRS profits interest to A in connection with A's performance of substantial services with respect to PRS's ATB. A's interest in PRS is an API. - (B) After 6 years, A retires and is no longer engaged in an ATB and does not perform any services with respect to its ATB and with respect to PRS. However, A retains the API in PRS. PRS continues to acquire new capital assets and to allocate gain to A from the disposition of those assets. Under [paragraph (a)(1)(i)](#a-1-i) of this section, A's interest in PRS remains an API after A retires. - (ii) **Example 2: Contribution of an API to a partnership.** Individuals A, B, and C each directly hold APIs in PRS, a partnership. A and B form a new partnership, GP, and contribute their APIs in PRS to GP. Following the contribution, each of A and B holds an Indirect API because each of A and B now indirectly holds an API in PRS through GP, a Passthrough Entity. Each of A's and B's interests in GP is a Passthrough Interest because each of A's and B's interest in GP represents an Indirect API. - (iii) **Example 3: Passthrough Interest, Indirect API, Passthrough Taxpayer.** Each of A, B, and C provides services to, and is an equal partner in, GP. GP is engaged in an ATB as defined in [§ 1.1061-1(a)](/cfr/26/1.1061-1.md?p=a), is the general partner of PRS, and provides substantial management services to PRS. In connection with GP's performance of substantial services in an ATB, PRS issues a profits interest to GP. Because GP's PRS interest was received in connection with GP's providing services in an ATB, GP is a Passthrough Taxpayer and GP's interest in PRS is an API. Because A, B, and C are partners in GP, they each hold a Passthrough Interest in GP and an Indirect API in PRS. Each of A, B, and C is treated as an Owner Taxpayer because each is a partner in GP and because each holds an Indirect API in PRS in connection with the performance of its services to GP's ATB. - (iv) **Example 4: S corporation, Passthrough Interest, Indirect API, and Passthrough Taxpayer.** A owns all of the stock of S Corp, an S corporation. S Corp is engaged in an ATB, as defined in [§ 1.1061-1(a)](/cfr/26/1.1061-1.md?p=a). S Corp is the general partner of PRS, a partnership, and provides substantial management services to PRS. A provides substantial services in S Corp's ATB. In connection with S Corp providing substantial services to PRS, PRS issues a profits interest to S Corp. S Corp's interest in PRS is its only asset. Because S Corp's profits interest in PRS was issued to S Corp in connection with substantial services in an ATB, S Corp is a Passthrough Taxpayer and its interest in PRS is an API. Because A is a shareholder in S Corp, A holds a Passthrough Interest in S Corp and an Indirect API in PRS as a result of S Corp's API in PRS. A is treated as an Owner Taxpayer because A holds an interest in S Corp, a Passthrough Taxpayer, and also indirectly holds an API in PRS in connection with A's services in S Corp's ATB. - (v) **Example 5: Indirect API, Related Person, and Passthrough Taxpayer.** Each of A, B, and C is an equal partner in partnership GP, the general partner of PRS. GP's Specified Actions do not satisfy the ATB Activity Test under [§ 1.1061-1(a)](/cfr/26/1.1061-1.md?p=a) and as a result, GP's actions do not establish an ATB. Management Company is a Related Person with respect to GP within the meaning of sections [267(b)](/cfr/26/267.md?p=b) and [707(b)](/cfr/26/707.md?p=b), is engaged in an ATB, and provides substantial management services to PRS that are sufficient to satisfy the ATB Activity Test. Management Company's actions are attributed to GP under paragraphs [(a)(1)(iv)](#a-1-iv) and [(b)(1)(i)(C)](#b-1-i-C) of this section because Management Company is a Related Person to GP. In connection with Management Company's services to PRS, PRS issues a profits interest to GP. Because its PRS profits interest is issued to GP in connection with services provided by Management Company, a Related Person, GP is a Passthrough Taxpayer and its interest in PRS is an API. Unless an exception described in [§ 1.1061-3](/cfr/26/1.1061-3.md) applies, because A, B, and C are partners in GP, they each hold a Passthrough Interest in GP and an Indirect API in PRS. A, B, and C are treated as Owner Taxpayers because they hold an interest in GP, a Passthrough Taxpayer. - (b) **Application of the ATB Activity Test—** - (1) **In general.** The ATB Activity Test is satisfied if both Raising and Returning Actions and Investing or Developing Actions are conducted by an Owner Taxpayer, Passthrough Taxpayer, or one or more Related Persons with respect to an Owner Taxpayer or Passthrough Taxpayer, and the total level of activity, including the combined activities of all Related Persons, satisfies the level of activity that would be required to establish a trade or business under [section 162](/cfr/26/162.md). - (i) **Rules for applying the ATB Activity Test—** - (A) **Aggregate Specified Actions taken into account.** The determination of whether the ATB Activity Test is satisfied is based on the combined activities conducted that qualify as either Raising or Returning Capital Actions and Investing or Developing Actions. The fact that either Raising or Returning Capital Actions or Investing or Developing Actions are only infrequently taken does not preclude the test from being satisfied if the combined Specified Actions meet the test. - (B) **Raising or Returning Capital Actions and Investing or Developing Actions are not both required to be taken in each taxable year.** Raising or Returning Capital Actions and Investing or Developing Actions are not both required to be taken in each taxable year in order to satisfy the ATB Activity Test. For example, the ATB Activity Test will be satisfied if Investing or Developing Actions are not taken in the current taxable year, but sufficient Raising or Returning Capital Actions are taken in anticipation of future Investing or Developing Actions. Additionally, the ATB Activity Test will be satisfied if no Raising or Returning Capital Actions are taken in the current taxable year, but have been taken in a prior taxable year (regardless of whether the ATB Activity Test was met in the prior year), and sufficient Investing or Developing Actions are undertaken by the taxpayer in the current taxable year. - (C) **Combined conduct by multiple related entities taken into account—** (1) Related Entities. If a Related Person(s) (within the meaning of [§ 1.1061-1(a)](/cfr/26/1.1061-1.md?p=a)) solely or primarily performs Raising or Returning Capital Actions and one or more other Related Person(s) solely or primarily performs Investing or Developing Actions, the combination of the activities performed by these Related Persons will be taken into account in determining whether the ATB Activity Test is satisfied. (2) Actions taken by an agent or delegate. Specified Actions taken by an agent or a delegate in its capacity as an agent or a delegate of a principal will be taken into account by the principal in determining whether the ATB Activity Test is satisfied with respect to the principal. These Specified Actions are also taken into account in determining whether the ATB Activity test is satisfied with respect to the agent or the delegate. - (ii) **Developing Specified Assets.** Developing Specified Assets takes place if it is represented to investors, lenders, regulators, or other interested parties that the value, price, or yield of a portfolio business may be enhanced or increased in connection with choices or actions of a service provider. Merely exercising voting rights with respect to shares owned or similar activities do not amount to developing Specified Assets. - (iii) **Partnerships.** Investing or Developing Actions directly conducted with respect to Specified Assets held by a partnership are counted towards the ATB Activity Test. Additionally, a portion of the Investing or Developing Actions conducted with respect to the interests in a partnership that holds Specified Assets is counted towards the ATB Activity Test. This portion is the value of the partnership's Specified Assets over the value of all of the partnership's assets. Actions taken to manage a partnership's working capital will not be taken into account in determining the portion of Investing or Developing Actions conducted with respect to the interests in the partnership. - (2) **Examples.** The following examples illustrate the application of the ATB Activity Test described in [paragraph (b)(1)](#b-1) of this section. - (i) **Example 1: Combined activities of Raising or Returning Capital Actions and Investing or Developing Actions.** During the taxable year, B takes a small number of actions to raise capital for new investments. B takes numerous actions to develop Specified Assets. B's actions with respect to raising capital and B's actions with respect to developing Specified Assets are combined for the purpose of determining whether the ATB Activity Test is satisfied. These actions cumulatively rise to the level required to establish a trade or business under [section 162](/cfr/26/162.md). Thus, B satisfies the ATB Activity Test. - (ii) **Example 2: Combining Specified Actions in multiple entities.** GP, a partnership, conducts Raising or Returning Capital Actions. Management Company, a partnership that is a Related Person to GP, conducts Investing or Developing Actions. When GP's and Management Company's activities are combined, the ATB Activity Test is satisfied. Accordingly, both GP and Management Company are engaged in an ATB, and services performed by either GP or Management Company are performed in an ATB under [paragraph (b)(1)](#b-1) of this section. - (iii) **Example 3: Investing or Developing Actions taken after Raising or Returning Capital Actions that do not meet the ATB Activity Test.** In year 1, PRS engaged in Raising or Returning Capital Actions to fund PRS's investment in Specified Assets. However, PRS' Specified Actions during year 1 did not satisfy the ATB Activity Test because they did not satisfy the level of activity required to establish a trade or business under [section 162](/cfr/26/162.md). Therefore, PRS was not engaged in an ATB in year 1. In year 2, PRS engaged in significant Investing or Developing Actions but did not engage in any Raising or Returning Capital Actions. In year 2, PRS's Investing or Developing Actions rise to the level required to establish a trade or business under [section 162](/cfr/26/162.md). Because PRS has cumulatively engaged in both Investing or Developing Actions and Raising or Returning Capital Actions and because the Specified Actions rise to the level of activity required to establish a trade or business under [section 162](/cfr/26/162.md), PRS is engaged in an ATB in year 2. - (iv) **Example 4: Raising or Returning Capital Actions taken in anticipation of Investing or Developing Actions.** In year 1, A only conducted Raising or Returning Capital Actions. A's Raising or Returning Capital Actions were undertaken to raise capital to invest in Specified Assets with the goal of increasing their value through Investing or Developing Actions and rise to the level of activity required to establish a trade or business under [section 162](/cfr/26/162.md). A did not take Investing or Developing Actions during the taxable year. A's Raising or Returning Capital Actions satisfy the ATB Activity Test because they were undertaken in anticipation of also engaging in Investing or Developing Actions. Therefore, the ATB Activity Test is satisfied, and A is engaged in an ATB in year 1. - (v) **Example 5: Attribution of delegate's actions.** GP is the general partner of PRS. GP is responsible for providing management services to PRS. GP contracts with Management Company to provide management services on GP's behalf to PRS. GP and Management Company are not Related Persons. The Specified Actions taken by Management Company on behalf of GP are attributed to GP for purposes of the ATB Activity Test because the Management Company is operating as a delegate of GP. Additionally, those Specified Actions are taken into account by Management Company for purposes of the ATB Activity Test and whether it is engaged in an ATB. - (vi) **Example 6: ATB Activity Test not satisfied.** A is the manager of a hardware store. Partnership owns the hardware store, including the building in which the hardware business is conducted. In connection with A's services as the manager of the hardware store, a profits interest in Partnership is transferred to A. Partnership's business involves buying hardware from wholesale suppliers and selling it to customers. The hardware is not a Specified Asset. Although real estate is a Specified Asset if it is held for rental or investment purposes, Partnership holds the building for the purpose of conducting its hardware business and not for rental or investment purposes. Therefore, the building is not a Specified Asset as to Partnership. Partnership also maintains and manages a certain amount of working capital for its business, but actions with respect to working capital are not taken into account for the purpose of determining whether the ATB Activity Test is met. Partnership is not a Related Person with respect to any person who takes Specified Actions. Partnership is not engaged in an ATB because the ATB Activity Test is not satisfied. Although Partnership raises capital, its Raising or Returning Capital Actions alone do not satisfy the ATB Activity Test. Further, Partnership takes no Investing or Developing Actions because it holds no Specified Assets other than working capital. Partnership is not in an ATB and the profits interest transferred to A is not an API. - (c) **Applicability date.** The provisions of this section apply to taxable years of Owner Taxpayers and Passthrough Entities beginning on or after January 19, 2021. An Owner Taxpayer or Passthrough Entity may choose to apply this section to a taxable year beginning after December 31, 2017, provided that they apply the [Section 1061](/cfr/26/1061.md) Regulations in their entirety to that year and all subsequent years. # §1.1061-3. Exceptions to the definition of an API. - (a) **A partnership interest held by an employee of another entity not conducting an ATB.** An API does not include any interest transferred to a person in connection with the performance of substantial services by that person as an employee of another entity that is conducting a trade or business (other than an ATB) and the person provides services only to such other entity. - (b) **Partnership interest held by a corporation—** - (1) **In general.** An API does not include any interest directly or indirectly held by a corporation. - (2) **Treatment of interests held by an S corporation or a qualified electing fund.** For purposes of this section, a corporation does not include an entity for which an election was made to treat the entity as a Passthrough Entity. Thus, the following entities are not treated as corporations for purposes of [section 1061](/cfr/26/1061.md)— - (i) An S corporation for which an election under [section 1362(a)](/cfr/26/1362.md?p=a) is in effect; and - (ii) A passive foreign investment company (PFIC) with respect to which the shareholder has a qualified electing fund (QEF) election under [section 1295](/cfr/26/1295.md) in effect. - (c) **Capital Interest Gains and Losses—** - (1) **In general.** Capital Interest Gains and Losses are not subject to [section 1061](/cfr/26/1061.md) and, therefore, are not included in calculating an Owner Taxpayer's Recharacterization Amount. - (2) **Capital Interest Gains and Losses defined.** For purposes of [paragraph (c)(1)](#c-1) of this section, Capital Interest Gains and Losses are Capital Interest Allocations that meet the requirements of [paragraph (c)(3)](#c-3) of this section and Capital Interest Disposition Amounts that meet the requirements of [paragraph (c)(4)](#c-4) of this section. - (3) **General rules for determining Capital Interest Allocations—** - (i) **Commensurate with capital contributed.** An allocation will be considered a Capital Interest Allocation if the allocation to the API Holder with respect to its capital interest is determined and calculated in a similar manner as the allocations with respect to capital interests held by similarly situated Unrelated Non-Service Partners who have made significant aggregate capital contributions as described in [paragraph (c)(3)(iv)](#c-3-iv) of this section. For purposes of this [paragraph (c)(3)](#c-3), a capital interest is an interest that would give the holder a share of the proceeds if the partnership's assets were sold at fair market value at the time the interest was received and the proceeds were then distributed in a complete liquidation of the partnership. - (ii) **In a similar manner.** For purposes of [paragraph (c)(3)(i)](#c-3-i) of this section, a Capital Interest Allocation to an API Holder will be treated as made in a similar manner if allocations and distribution rights with respect to the capital contributed by an API Holder to which the API Holder's Capital Interest Allocation relates are reasonably consistent with allocation and distribution rights with respect to capital contributed by Unrelated Non-Service Partners where the Unrelated Non-Service Partner requirement is met. For purposes of this [paragraph (c)(3)(ii)](#c-3-ii), allocation and distribution rights for an API Holder that are limited to a particular class of partnership capital interests or that are determined with respect to capital contributions invested in a particular partnership investment will be considered as made in a similar manner to allocations and distribution rights of Unrelated Non-Service Partners where the Unrelated Non-Service Partner requirement is met for the applicable interest class or partnership investment. - (A) **Relevant factors.** For purposes of this [paragraph (c)(3)(ii)](#c-3-ii), the following factors are not exclusive, but are relevant factors in determining whether allocation and distribution rights with respect to capital contributed by an API Holder are reasonably consistent with allocation and distribution rights of persons meeting the Unrelated Non-Service Partner requirement: The amount and timing of capital contributed, the rate of return on capital contributed, the terms, priority, type and level of risk associated with capital contributed, and the rights to cash or property distributions during the partnership's operations and on liquidation. Accordingly, an allocation to an API Holder will not fail to qualify solely because the allocation is subordinated to allocations made to Unrelated Non-Service Partners, because an allocation to an API Holder is not reduced by the cost of services provided by the API Holder or a Related Person to the partnership, where the cost of services provided includes management fees or API allocations, or because an API Holder has a right to receive tax distributions while Unrelated Non-Service Partners do not, where such distributions are treated as advances against future distributions. - (B) **Clear identification requirement.** For purposes of this [paragraph (c)(3)(ii)](#c-3-ii), allocations will be considered made in a similar manner only if the allocations to the API Holder and the Unrelated Non-Service Partners are allocations with respect to, and corresponding to, such partners' contributed capital that are separate and apart from allocations made to the API Holder with respect to its API and where both the partnership agreement and the partnership's contemporaneous books and records clearly demonstrate that the requirements of [paragraph (c)(3)](#c-3) of this section have been met. - (iii) **Reinvestment of API Gain.** If an API Holder is allocated API Gain by a Passthrough Entity, to the extent that an amount equal to the API Gain is reinvested in the Passthrough Entity by the API Holder (either as the result of an actual distribution and recontribution of the API Gain amount or the retention of the API Gain amount by the Passthrough Entity), the amount will be treated as a contribution to the Passthrough Entity for a capital interest that may produce Capital Interest Allocations for the API Holder, provided such allocations meet the requirements of this [paragraph (c)(3)](#c-3). - (iv) **Unrelated Non-Service Partner requirement.** For purposes of [paragraph (c)(3)](#c-3) of this section, the Unrelated Non-Service Partner requirement means that Unrelated Non-Service Partners must have made significant aggregate capital contributions in relation to total capital contributions of all partners. Unrelated Non-Service Partners will be treated as having made significant aggregate capital contributions provided such partners possess five percent or more of the aggregate capital contributed to the partnership at the time the allocations are made. With respect to an API Holder with allocation and distribution rights that are attributable to a particular interest class or partnership investment, the Unrelated Non-Service requirement must be met with respect to that particular interest class or partnership investment. - (v) **Proceeds of certain loans not taken into account for Capital Interest Allocation purposes—** - (A) **General rule.** For purposes of the [Section 1061](/cfr/26/1061.md) Regulations, an allocation is not a Capital Interest Allocation to the extent the allocation is attributable to the contribution of an amount of capital to a partnership that, directly or indirectly, results from, or is attributable to, any loan or other advance made or guaranteed, directly or indirectly, by the partnership or another partner in the partnership (or any Related Person with respect to such persons), except to the extent a loan or advance is described in [paragraph (c)(3)(v)(B)](#c-3-v-B) of this section. However, the repayments on a loan described in the preceding sentence are taken into account as capital contributed (and may therefore generate Capital Interest Allocations) as those amounts are paid by the partner, provided that the loan is not repaid with the proceeds of another loan described in the preceding sentence. - (B) **Recourse liability.** [Paragraph (c)(3)(v)(A)](#c-3-v-A) of this section does not apply with respect to an allocation attributable to a contribution made by an individual service provider that, directly or indirectly, results from, or is attributable to, a loan or advance from another partner in the partnership (or any Related Person with respect to such other partner, other than the partnership) to such individual service provider if the individual service provider is personally liable for the repayment of such loan or advance. A contribution made by an individual service provider includes a contribution made by an entity that is wholly owned by, and disregarded as separate from, the individual service provider as described in [§ 1.1061-2(a)(1)(v)](/cfr/26/1.1061-2.md?p=a-1-v), including a contribution attributable to a loan or advance made to the disregarded entity by another partner in the partnership (or any Related Person with respect to such other partner, other than the partnership) if the individual service provider is personally liable for the repayment of any and all borrowed amounts that are not repaid by the disregarded entity. For purposes of this [paragraph (c)(3)(v)(B)](#c-3-v-B), an individual service provider is personally liable for the repayment of a loan or advance made by another partner (or any Related Person with respect to such other partner, other than the partnership) if— (1) The loan or advance is fully recourse to the individual service provider; (2) The individual service provider has no right to reimbursement from any other person; and (3) The loan or advance is not guaranteed by any other person. - (vi) **Items that are not included in Capital Interest Allocations.** Capital Interest Allocations do not include— - (A) Amounts that are treated as API Gains and Losses and Unrealized API Gains and Losses; or - (B) Items that are not taken into account for purposes of [section 1061](/cfr/26/1061.md) under [§ 1.1061-4(b)(7)](/cfr/26/1.1061-4.md?p=b-7). - (4) **Capital Interest Disposition Amounts—** - (i) **In general.** The term Capital Interest Disposition Amount means the amount of long-term capital gain or loss recognized on the sale or disposition of all or a portion of a Passthrough Interest that is treated as Capital Interest Gain or Loss. In general, long-term capital gain or loss recognized on the sale or disposition of a Passthrough Interest is deemed to be API Gain or Loss unless it is determined under [paragraph (c)(4)(ii)](#c-4-ii) of this section to be a Capital Interest Disposition Amount. - (ii) **Determination of the Capital Interest Disposition Amount.** If a Passthrough Interest that includes a right to allocations of Capital Interest Gains and Losses is disposed of, the amount of long-term capital gain or loss that is treated as a Capital Interest Disposition Amount is determined under the rules provided in this [paragraph (c)(4)(ii)](#c-4-ii). - (A) First, determine the amount of long-term capital gain or loss that would be allocated to the Passthrough Interest (or the portion of the Passthrough Interest sold) if all the assets of the Passthrough Entity (including gain or loss with respect to assets described in [§ 1.1061-4(b)(7)](/cfr/26/1.1061-4.md?p=b-7)) were sold for their fair market value in a fully taxable transaction immediately before the disposition of the Passthrough Interest (hypothetical asset sale). For purposes of this [paragraph (c)(4)(ii)](#c-4-ii), the assets of the Passthrough Entity include any assets held by a lower-tier Passthrough Entity in which the Passthrough Entity has a direct or indirect interest. - (B) Second, determine the amount from the hypothetical asset sale that would be allocated to the Passthrough Interest (or the portion of the Passthrough Interest sold) as Capital Interest Allocations under [paragraph (c)(3)](#c-3) of this section. - (C) Third, if the transferor recognized long-term capital gain upon disposition of the Passthrough Interest and only net short-term capital losses, net long-term capital losses, or both, are allocated to the Passthrough Interest under [paragraph (c)(4)(ii)(B)](#c-4-ii-B) of this section from the hypothetical asset sale, all of the long-term capital gain is API Gain. If the transferor recognized long-term capital loss on the disposition of the Passthrough Interest and only net short-term capital gains, net long-term capital gains, or both, are allocated to the Passthrough Interest under [paragraph (c)(4)(ii)(B)](#c-4-ii-B) of this section, then all the long-term capital loss is API Loss. - (D) If [paragraph (c)(4)(ii)(C)](#c-4-ii-C) of this section does not apply and long-term capital gain is recognized on the disposition of the Passthrough Interest, the amount of long-term capital gain that the transferor of the Passthrough Interest recognizes that is treated as a Capital Interest Disposition Amount is determined by multiplying long-term capital gain recognized on the disposition of the Passthrough Interest by a fraction, the numerator of which is the amount of long-term capital gain determined under [paragraph (c)(4)(ii)(B)](#c-4-ii-B) of this section, and the denominator of which is the amount of long-term capital gain determined under [paragraph (c)(4)(ii)(A)](#c-4-ii-A) of this section, with the percentage represented by the fraction limited to 100 percent. Alternatively, if [paragraph (c)(4)(ii)(C)](#c-4-ii-C) of this section does not apply and long-term capital loss is recognized on the disposition of the Passthrough Interest, the amount of long-term capital loss treated as a Capital Interest Disposition Amount is determined by multiplying the transferor's capital loss by a fraction, the numerator of which is the amount of long-term capital loss determined under [paragraph (c)(4)(ii)(B)](#c-4-ii-B) of this section, and the denominator of which is the amount of long-term capital loss determined under [paragraph (c)(4)(ii)(A)](#c-4-ii-A) of this section, with the percentage represented by the fraction limited to 100 percent. - (E) In applying this [paragraph (c)(4)(ii)](#c-4-ii), allocations of amounts that are not included in determining the amount of long-term capital gain or loss recognized on the sale or disposition of the Passthrough Interest are not included. See, for example, [section 751(a)](/cfr/26/751.md?p=a). - (5) **Capital Interest Allocations made by a Passthrough Entity that is an API Holder.** An allocation made to a Passthrough Entity that holds an API in a lower-tier Passthrough Entity will be considered a Capital Interest Allocation if it meets the principles set forth in paragraphs [(c)(3)](#c-3) and [(4)](#c-4) of this section (other than [paragraph (c)(3)(iv)](#c-3-iv) of this section). For purposes of applying the Capital Interest Allocation rules in this [paragraph (c)(5)](#c-5) to a tiered partnership structure, to the extent that a Capital Interest Allocation that is made by a lower-tier partnership to an upper-tier partnership is properly allocated to the upper-tier partnership's partners with respect to their capital interests in the upper-tier partnership in a manner that is respected under 704(b) (taking into account the principles of [section 704(c)](/cfr/26/704.md?p=c)), such allocation is a Capital Interest Allocation. - (6) **Examples.** The rules of this [paragraph (c)](#c) are illustrated by the following examples. - (i) **Example 1: Capital Interest Allocations—** - (A) **Facts.** Each of A, B, and C contributes $100 to GP and is an equal partner in GP, a partnership that is the general partner of PRS, a partnership. The contributions are not attributable to loans or advances described in [paragraph (c)(3)(v)(A)](#c-3-v-A) of this section. PRS's other partners are Unrelated Non-Service Partners. Each of GP and PRS makes allocations to its partners in accordance with its partners' interests in that partnership, as described in [§ 1.704-1(b)(3)](/cfr/26/1.704-1.md?p=b-3). GP holds a 20% profits interest in PRS that is an API that GP received in exchange for providing substantial services to PRS in an ATB. GP's API is an Indirect API to each of A, B, and C. GP contributes the $300 of capital contributed by A, B and C to PRS. GP's $300 contribution equals 2% of the contributed capital made by all of PRS's partners ($15,000). PRS's partnership agreement describes its partners' economic distribution rights with respect to its liquidating proceeds as follows: First, liquidating proceeds are proportionately distributed to each of GP and the Unrelated Non-Service Partners equal to the amount necessary to return each of those partners' unreturned capital; second, liquidating proceeds are distributed to GP with respect to its API in PRS; and, finally, any residual liquidating proceeds are distributed, proportionately, 98% to the Unrelated Non-Service Partners and 2% to GP. During its initial taxable year, PRS has $10,000 of net capital gain, causing an increase in PRS's distributable proceeds of $10,000. In accordance with the partners' economic rights as described in PRS's partnership agreement, PRS allocates $2,160 of net capital gain to GP (a $2,000 API allocation plus $160 ($8,000 ($10,000−$2,000) × 2%), with respect to GP's contributed capital) and $7,840 of net capital gain to the Unrelated Non-Service Partners with respect to their contributed capital. GP allocates $720 ($2,160/3) of this net capital gain to each of A, B, and C in accordance with their interests in GP. - (B) **PRS's Capital Interest Allocation Analysis.** Because PRS's partnership agreement provides for no differences as to the amount and timing of capital contributed, the rate of return on capital contributed, the type and level of risk associated with capital contributed, or the rights to cash or property distributions during the PRS's operations and on liquidation, the allocations and distribution rights with respect the capital contributed by GP are reasonably consistent with the allocation and distribution rights with respect to capital contributed by Unrelated Non-Service Partners. Accordingly, GP's allocation of $160 is a Capital Interest Allocation that is treated as made in a similar manner as the allocations made to the Unrelated Non-Service Partners. - (C) **GP's Capital Interest Allocation Analysis.** GP is allocated $2,160 from PRS, consisting of a $2,000 API allocation and a $160 Capital Interest Allocation. The $160 Capital Interest Allocation is allocated equally to A, B, and C based on their capital contributions to GP. Therefore, they qualify as Capital Interest Allocations by GP. See [paragraph (c)(5)](#c-5) of this section. The $2,000 of gain allocated by PRS to GP with respect to GP's API cannot be treated as a Capital Interest Allocation by GP and therefore is subject to [section 1061](/cfr/26/1061.md). In summary, A, B, and C are each allocated $720 of capital gain from PRS ($2,160/3). Of this amount, $667 is API Gain ($2,000/3) and $53 is a Capital Interest Allocation ($160/3). - (ii) **Example 2: Sale of a Passthrough Interest—** - (A) **Facts.** In Year 1, A, B, and C form GP, a partnership. Each of A, B, and C contributes $100 to GP and is an equal partner in GP. The contributions are not attributable to loans or advances described in [paragraph (c)(3)(v)(A)](#c-3-v-A) of this section. GP invests the $300 in Asset X in Year 1. GP is also the general partner of PRS, a partnership. PRS's other partners are Unrelated Non-Service Partners. GP holds a 20% profits interest in PRS that is an API that GP received in exchange for providing substantial services to PRS in an ATB. GP's API is an Indirect API to each of A, B, and C. Each of GP and PRS makes allocations to its partners in accordance with its partners' interests in that partnership, as described in [§ 1.704-1(b)(3)](/cfr/26/1.704-1.md?p=b-3). In Year 3, A sells A's interest in GP to an unrelated third party for $800 and recognizes $700 of capital gain on the sale. If PRS had sold its assets in a hypothetical asset sale as required by [paragraph (c)(4)(ii)(A)](#c-4-ii-A) of this section and liquidated immediately before A sold its interest in GP, GP would have been allocated $1,800 of long-term capital gain with respect to GP's API in PRS, and GP would have allocated $600 of this $1,800 to A. If GP sold Asset X for its fair market value and liquidated immediately before A sold its interest in GP, A would have been allocated $100 of long-term capital gain. - (B) **Analysis.** GP does not have a capital interest in PRS. Therefore, its allocations from PRS are allocations with respect to its API which are subject to [section 1061](/cfr/26/1061.md). The total gain allocable to A as a result of the hypothetical liquidations would be $700. Under [paragraph (c)(4)(ii)(D)](#c-4-ii-D) of this section, $100 of the $700 of A's interest sale gain is A's Capital Interest Disposition Amount, and is not subject to [section 1061](/cfr/26/1061.md). - (iii) **Example 3: Reinvestment of Realized API Gain.** A, B, and C are partners in PRS, a partnership. At the beginning of Year 1, A is issued an API in PRS in exchange for providing substantial services to PRS in an ATB. A has no capital interest in PRS. During Year 1, PRS's assets appreciate by $100. At the end of Year 1, under the terms of its partnership agreement, if PRS were to sell all of its assets at their fair market value and distribute the proceeds in a complete liquidation, A would receive $20 with respect to its API. Thus, at the end of Year 1, A has $20 of Unrealized API Gain. In Year 2, PRS sells Asset X, an asset that PRS owned in Year 1, and allocates $8 of the long-term capital gain to A as API Gain. As a result, $8 of A's $20 of Unrealized API Gain becomes API Gain that is subject to [section 1061](/cfr/26/1061.md). A reinvests A's share of the proceeds from the Asset X sale in PRS. As a result, under [paragraph (c)(3)(iii)](#c-3-iii) of this section, A has an $8 capital interest in PRS and, provided the requirements of [paragraph (c)(3)](#c-3) of this section are met, A may receive future Capital Interest Allocations with respect to the capital interest. - (d) **Partnership interest acquired by purchase by an unrelated person.** If a person (acquirer) acquires an interest in a partnership (target partnership) by taxable purchase for fair market value that, but for the exception set forth in this [paragraph (d)](#d), would be an API, the transferor of the interest will be treated as selling an API but the acquirer will not be treated as acquiring an API if— - (1) **Acquirer not a Related Person.** Immediately before the purchase, the acquirer is not a Related Person with respect to— - (i) Any person who provides services in the Relevant ATB; or - (ii) Any service providers who provide services to, or for the benefit of, the target partnership or a lower-tier partnership in which the target partnership holds an interest, directly or indirectly. - (2) **Section 1061(d) not applicable.** [Section 1061(d)](/cfr/26/1061.md?p=d) does not apply to the transaction (as provided in [§ 1.1061-5](/cfr/26/1.1061-5.md)). - (3) **Acquirer not a service provider.** At the time of the purchase, the acquirer has not provided, does not provide, and does not anticipate providing services to, or for the benefit of, the target partnership, directly or indirectly, or any lower-tier partnership in which the target partnership directly or indirectly holds an interest. - (e) [Reserved] - (f) **Applicability date—** - (1) **General rule.** Except as provided in paragraphs [(f)(2)](#f-2) and [(3)](#f-3) of this section, the provisions of this section apply to taxable years of Owner Taxpayers and Passthrough Entities beginning on or after January 19, 2021. An Owner Taxpayer or Passthrough Entity may choose to apply this section to a taxable year beginning after December 31, 2017, provided that they apply the [Section 1061](/cfr/26/1061.md) Regulations in their entirety to that year and all subsequent years. - (2) **Partnership interest held by an S corporation.** [Paragraph (b)(2)(i)](#b-2-i) of this section, which provides that the exception under [section 1061(c)(1)](/cfr/26/1061.md?p=c-1) to the definition of an API does not apply to a partnership interest held by an S corporation with an election under [section 1362(a)](/cfr/26/1362.md?p=a) in effect, applies to taxable years beginning after December 31, 2017. - (3) **Partnership interest held by a PFIC with respect to which the shareholder has a QEF election in effect.** [Paragraph (b)(2)(ii)](#b-2-ii) of this section, which provides that the exception under [section 1061(c)(1)](/cfr/26/1061.md?p=c-1) to the definition of an API does not apply to a partnership interest held by a PFIC with respect to which the shareholder has a QEF election in effect under [section 1295](/cfr/26/1295.md), applies to taxable years of an Owner Taxpayer and Passthrough Entity beginning after August 14, 2020. # §1.1061-4. Section 1061 computations. - (a) **Computations—** - (1) **Recharacterization Amount.** The Recharacterization Amount is the amount that an Owner Taxpayer must treat as short-term capital gain under [section 1061(a)](/cfr/26/1061.md?p=a). The Recharacterization Amount equals— - (i) The Owner Taxpayer's One Year Gain Amount; less - (ii) **The Owner Taxpayer's Three Year Gain Amount.** - (2) **One Year Gain Amount and Three Year Gain Amount—** - (i) **One Year Gain Amount.** The Owner Taxpayer's One Year Gain Amount is the sum of— - (A) The Owner Taxpayer's combined net API One Year Distributive Share Amount from all APIs held during the taxable year; and - (B) **The Owner Taxpayer's API One Year Disposition Amount.** - (ii) **Three Year Gain Amount.** The Owner Taxpayer's Three Year Gain Amount is the sum of— - (A) The Owner Taxpayer's combined net API Three Year Distributive Share Amount from all APIs held during the taxable year; and - (B) **The Owner Taxpayer's API Three Year Disposition Amount.** - (3) **API One Year Distributive Share Amount and API Three Year Distributive Share Amount—** - (i) **API One Year Distributive Share Amount.** The API One Year Distributive Share Amount equals— - (A) The API Holder's distributive share of net long-term capital gain or loss from the partnership for the taxable year (including capital gain or loss on the disposition of Distributed API Property by an API Holder that is a Passthrough Entity or the disposition of all or a part of an API by an API Holder that is a Passthrough Entity), with respect to the partnership interest held by the API Holder calculated without the application of [section 1061](/cfr/26/1061.md); less - (B) To the extent included in the amount determined under [paragraph (a)(3)(i)(A)](#a-3-i-A) of this section, the aggregate of— (1) Amounts that are not taken into account for purposes of [section 1061](/cfr/26/1061.md) under [paragraph (b)(7)](#b-7) of this section; and (2) Capital Interest Gains and Losses as determined under [§ 1.1061-3(c)(2)](/cfr/26/1.1061-3.md?p=c-2). - (ii) **API Three Year Distributive Share Amount.** The API Three Year Distributive Share Amount equals the API One Year Distributive Share Amount, less— - (A) Items included in the API One Year Distributive Share Amount that would not be treated as a long-term gain or loss if three years is substituted for one year in paragraphs (3) and (4) of section 1222; and - (B) Any adjustments resulting from the application of the Lookthrough Rule under [paragraph (b)(9)(ii)](#b-9-ii) of this section when an API is disposed of by an API Holder that is a Passthrough Entity. - (4) **API One Year Disposition Amount and API Three Year Disposition Amount—** - (i) **API One Year Disposition Amount.** The API One Year Disposition Amount is the combined net amount of— - (A) Long-term capital gains and losses recognized during the taxable year by an Owner Taxpayer, including long-term capital gain computed under the installment method that is taken into account for the taxable year, on the disposition of all or a portion of an API that has been held for more than one year, including a disposition to which the Lookthrough Rule applies; - (B) Long-term capital gain and loss recognized by an Owner Taxpayer due to a distribution with respect to an API during the taxable year that is treated under [section 731(a)](/cfr/26/731.md?p=a) as gain or loss from the sale or exchange of a partnership interest held for more than one year; and, - (C) Long-term capital gains and losses recognized by an Owner Taxpayer on the disposition of Distributed API Property (taking into account deemed exchanges under [section 751(b)](/cfr/26/751.md?p=b)) during the taxable year that has a holding period of more than one year but not more than three years to the distributee Owner Taxpayer on the date of disposition, excluding items described in [paragraph (b)(7)](#b-7) of this section. - (ii) **API Three Year Disposition Amount.** The API Three Year Disposition Amount is the combined net amount of— - (A) Long-term capital gains and losses recognized during the taxable year by an Owner Taxpayer, including long-term capital gain computed under the installment method that is taken into account for the taxable year, on the disposition of all or a portion of an API that has been held for more than three years and to which the Lookthrough Rule does not apply; - (B) Long-term capital gains and losses recognized by an Owner Taxpayer on the disposition during the taxable year of all or a portion of an API that has been held for more than three years in a transaction to which the Lookthrough Rule in [paragraph (b)(9)](#b-9) of this section applies, less any adjustments required under the Lookthrough Rule in [paragraph (b)(9)(ii)](#b-9-ii) of this section; and - (C) Long-term capital gains and losses recognized on a distribution with respect to an API during the taxable year that is treated under [sections 731(a)](/cfr/26/731.md?p=a) as gain or loss from the sale or exchange of a partnership interest held for more than three years. - (b) **Special rules for calculating the One Year Gain Amount and the Three Year Gain Amount—** - (1) **One Year Gain Amount equals zero or less.** If an Owner Taxpayer's One Year Gain Amount is zero or results in a loss, the Recharacterization Amount for the taxable year is zero and [section 1061(a)](/cfr/26/1061.md?p=a) does not apply. - (2) **Three Year Gain Amount equals zero or less.** If an Owner Taxpayer's Three Year Gain Amount is less than or equal to $0, the Three Year Gain Amount is zero for purposes of calculating the Recharacterization Amount. - (3) **One Year Gain Amount less than Three Year Gain Amount.** If the One Year Gain Amount and the Three Year Gain Amount are both greater than zero but the One Year Gain Amount is less than the Three Year Gain Amount, none of the One Year Gain Amount is included in the Recharacterization Amount for the taxable year. - (4) **Installment sale gain.** The One Year Gain Amount under [paragraph (a)(2)(i)](#a-2-i) of this section and the Three Year Gain Amount, as determined under [paragraph (a)(2)(ii)](#a-2-ii) of this section include long-term capital gains from installment sales. This includes long-term capital gain or loss recognized with respect to an API after December 31, 2017, with respect to an installment sale that occurred on or before December 31, 2017. The holding period of the asset upon the date of disposition is used for purposes of determining whether capital gain is included in the taxpayer's One Year Gain Amount or the Three Year Gain Amount. - (5) **Special rules for capital gain dividends from regulated investment companies (RICs) and real estate investment trusts (REITs)—** - (i) **API One Year Distributive Share Amount.** If a RIC or REIT reports or designates a dividend as a capital gain dividend and provides the One Year Amounts Disclosure as defined in [§ 1.1061-6(c)(1)(i)](/cfr/26/1.1061-6.md?p=c-1-i), the amount provided in the One Year Amounts Disclosure is included in the calculation of an API One Year Distributive Share Amount. If the RIC or REIT does not provide the One Year Amounts Disclosure, the full amount of the RIC's or REIT's capital gain dividend must be included in the calculation of an API One Year Distributive Share Amount. - (ii) **API Three Year Distributive Share Amount.** If a RIC or REIT reports or designates a dividend as a capital gain dividend and provides the Three Year Amounts Disclosure as defined in [§ 1.1061-6(c)(1)(ii)](/cfr/26/1.1061-6.md?p=c-1-ii), the amount provided in the Three Year Amounts Disclosure is used for the calculation of an API Three Year Distributive Share Amount. If the RIC or REIT does not provide the Three Year Amounts Disclosure, no amount of the RIC's or REIT's capital gain dividend may be used for the calculation of an API Three Year Distributive Share Amount. - (iii) **Loss on sale or exchange of stock.** If a RIC or REIT provides the Three Year Amounts Disclosure as provided in [paragraph (b)(5)(ii)](#b-5-ii) of this section, any loss on the sale or exchange of shares of a RIC or REIT held for six months or less is treated as a capital loss on an asset held for more than three years, to the extent of the amount of the Three Year Amounts Disclosure from that RIC or REIT. - (6) **Pro rata share of qualified electing fund (QEF) net capital gain—** - (i) **One year QEF net capital gain.** The calculation of an API One Year Distributive Share Amount includes an Owner Taxpayer's inclusion under [section 1293(a)(1)(B)](/cfr/26/1293.md?p=a-1-B) as limited by [section 1293(e)(2)](/cfr/26/1293.md?p=e-2) with respect to a passive foreign investment company (as defined in [section 1297(a)](/cfr/26/1297.md?p=a)) for which a QEF election (as described in [section 1295(a)](/cfr/26/1295.md?p=a)) is in effect for the taxable year. The amount of the inclusion may be reduced by the amount of long-term capital gain that is not taken into account for purposes of [section 1061](/cfr/26/1061.md) as provided in [paragraph (b)(7)](#b-7) of this section and may be reduced by the Owner Taxpayer's share of the excess, if any, of the Capital Interest Gain over Capital Interest Loss with respect to the QEF, provided in each case that the relevant information is provided by the QEF. See [§ 1.1061-6](/cfr/26/1.1061-6.md) for reporting rules. - (ii) **Three year QEF net capital gain adjustment.** For purposes of calculating an Owner Taxpayer's API Three Year Distributive Share Amount, the entire amount determined under [paragraph (b)(6)(i)](#b-6-i) of this section, after any allowed reduction, is included as an item in [paragraph (a)(3)(ii)(A)](#a-3-ii-A) of this section unless the QEF provides information to determine the amount of the inclusion that would constitute net capital gain (as defined in [§ 1.1293-1(a)(2)](/cfr/26/1.1293-1.md?p=a-2), as limited by [section 1293(e)(2)](/cfr/26/1293.md?p=e-2)) if the QEF's net capital gain for the taxable year were calculated under [section 1222(11)](/cfr/26/1222.md?p=11) applying paragraphs (3) and (4) of section 1222 by substituting three years for one year. If such information is provided, the amount included as an item in [paragraph (a)(3)(ii)(A)](#a-3-ii-A) of this section is the amount determined under [paragraph (b)(6)(i)](#b-6-i) of this section that would not be treated as long-term gain if three years were substituted for one year in paragraphs (3) and (4) of section 1222. See [§ 1.1061-6](/cfr/26/1.1061-6.md) for reporting rules. - (7) **Items not taken into account for purposes of section 1061.** The following items of long-term capital gain and loss are excluded from the calculation of the API One Year Distributive Share Amount in [paragraph (a)(3)(i)](#a-3-i) of this section and the API Three Year Distributive Share Amount in [paragraph (a)(3)(ii)](#a-3-ii) of this section— - (i) Long-term capital gain and long-term capital loss determined under [section 1231](/cfr/26/1231.md); - (ii) Long-term capital gain and long-term capital loss determined under [section 1256](/cfr/26/1256.md); - (iii) Qualified dividends included in net capital gain for purposes of [section 1(h)(11)(B)](/cfr/26/1.md?p=h-11-B); and - (iv) Capital gains and losses that are characterized as long-term or short-term without regard to the holding period rules in [section 1222](/cfr/26/1222.md), such as certain capital gains and losses characterized under the mixed straddle rules described in [section 1092(b)](/cfr/26/1092.md?p=b) and §§ [1.1092(b)-3T](/cfr/26/1.1092..3T.md), [1.1092(b)-4T](/cfr/26/1.1092..4T.md), and [1.1092(b)-6](/cfr/26/1.1092..6.md). - (8) **Holding period determination—** - (i) **Determination of holding period for purposes of the Three Year Gain Amount.** For purposes of computing the Three Year Gain Amount, the relevant holding period of either an asset or an API is determined under all provisions of the Code or regulations that are relevant to determining whether the asset or the API has been held for the long-term capital gain holding period by applying those provisions as if the holding period were three years instead of one year. - (ii) **Relevant holding period.** The relevant holding period is the direct owner's holding period in the asset sold. Accordingly, for purposes of determining an API Holder's Taxpayer's API One Year Distributive Share Amount and API Three Year Distributive Share Amount for the taxable year under [paragraph (a)(3)](#a-3) of this section, the partnership's holding period in the asset being sold or disposed of (whether a directly held asset or a partnership interest) is the relevant holding period for purposes of [section 1061](/cfr/26/1061.md). - (9) **Lookthrough Rule for certain API dispositions—** - (i) **Determination that the Lookthrough Rule applies—** - (A) **In general.** The Lookthrough Rule will apply if, at the time of disposition of an API held for more than three years— (1) The API would have a holding period of three years or less if the holding period of such API were determined by not including any period before the date that an Unrelated Non-Service Partner is legally obligated to contribute substantial money or property directly or indirectly to the Passthrough Entity to which the API relates. This [paragraph (b)(9)(i)(A)](#b-9-i-A) does not apply to the disposition of an API to the extent that the gain recognized upon the disposition of the API is attributable to any asset not held for portfolio investment on behalf of third party investors (as defined in [section 1061(c)(5)](/cfr/26/1061.md?p=c-5)). Solely for the purpose of this [paragraph (b)(9)(i)(A)](#b-9-i-A), a substantial legal obligation to contribute money or property is an obligation to contribute a value that is at least 5 percent of the partnership's total capital contributions as of the time of the API disposition; or (2) A transaction or series of transactions has taken place with a principal purpose of avoiding potential gain recharacterization under [section 1061(a)](/cfr/26/1061.md?p=a). - (B) **Determination that the Lookthrough Rule applies to the disposition of a Passthrough Interest.** [Paragraph (b)(9)(i)(A)](#b-9-i-A) of this section similarly applies with respect to a Passthrough Interest issued by an S corporation or a PFIC to the extent that the Passthrough Interest is treated as an API. - (ii) **Application of the Lookthrough Rule.** If the Lookthrough Rule applies, for purposes of computing an Owner Taxpayer's Recharacterization Amount, as described in [paragraph (a)](#a) of this section— - (A) The Owner Taxpayer must include the entire amount of capital gain recognized on the disposition of an API by the Owner Taxpayer in the Owner Taxpayer's API One Year Disposition Amount; and - (B) The Owner Taxpayer must include in its Three Year Disposition Amount an amount equal its One Year Disposition Amount (determined under [paragraph (b)(9)(ii)(A)](#b-9-ii-A) of this section) reduced by the Owner Taxpayer's share of the amount of any gain, directly or indirectly, from assets held for three years or less that would have been allocated to the Owner Taxpayer (to the extent attributable to the transferred API) by the partnership if the partnership had sold all of its property in a fully taxable transaction for cash in an amount equal to the fair market value of such property (taking into account [section 7701(g)](/cfr/26/7701.md?p=g)) immediately prior to the Owner Taxpayer's transfer of the API. - (C) In the case of an API disposition by an API Holder that is a Passthrough Entity and not an Owner Taxpayer, the principles set forth in [paragraph (b)(9)(ii)(A)](#b-9-ii-A) of this section must be applied to determine the amount to include in the Owner Taxpayer's One Year Distributive Amount and in [paragraph (b)(9)(ii)(B)](#b-9-ii-B) of this section to determine the amounts included in the Owner Taxpayer's Three Year Distributive Share Amount. - (10) **Section 83.** Except with respect to any portion of the interest that is a capital interest under [§ 1.1061-3(c)](/cfr/26/1.1061-3.md?p=c), this section applies regardless of whether an Owner Taxpayer or Passthrough Entity has made an election under [section 83(b)](/cfr/26/83.md?p=b) or included amounts in gross income under [section 83](/cfr/26/83.md). - (c) **Examples—** - (1) **Recharacterization rules.** The rules of [paragraph (a)](#a) of this section are illustrated by the following examples. Unless otherwise stated, all gains and losses are long-term capital gains and losses, none of the long-term capital gain or loss in this section is capital gain or loss not taken into account for purposes of [section 1061](/cfr/26/1061.md) under [paragraph (b)(7)](#b-7) of this section, and neither the Lookthrough Rule nor [section 751](/cfr/26/751.md) is applicable. - (i) **Example 1: Determination of API One Year and Three Year Distributive Share Amounts—** - (A) **Facts.** A holds an API in PRS but has no capital interest in PRS and is not entitled to a Capital Interest Allocation with respect to PRS. During the taxable year, PRS allocates to A $20 of long-term capital gain from the sale of capital asset X (which had been held by PRS for two years) and $40 of long-term capital gain from the sale of capital asset Y (which had held by PRS for five years). A has no other items of long-term capital gain or loss with respect to its interest in PRS during the taxable year. A has no other long-term capital gains or losses with respect to any other API during the taxable year. - (B) **Determination of A's API One Year Distributive Share Amount.** Under [paragraph (a)(3)(i)](#a-3-i) of this section, A has an API One Year Distributive Share Amount of $60. This amount is the sum of the $20 of the long-term capital gain allocated to A from PRS's sale of capital asset X and the $40 of long-term capital gain allocated to A from PRS's sale of capital asset Y. - (C) **Determination of A's API Three Year Distributive Share Amount.** (1) Under [paragraph (a)(3)(ii)](#a-3-ii) of this section, A's API Three Year Distributive Share Amount is equal to A's API One Year Distributive Amount, $60, less the sum of: (i) The items included in the API One Year Distributive Share Amount that would not be treated as a long-term gain or loss if three years is substituted for one year in paragraphs (3) and (4) of section 1222, $20; and (ii) Adjustments resulting from the application of the Lookthrough Rule under [paragraph (b)(9)(ii)](#b-9-ii) of this section, which under the facts in [paragraph (c)(1)(i)(A)](#c-1-i-A) of this section, is inapplicable. (2) Thus, A's API Three Year Distributive Share Amount is $40. - (D) **Determination of A's Recharacterization Amount.** Under [paragraph (a)(2)(i)](#a-2-i) of this section, A's One Year Gain Amount is equal to A's API One Year Distributive Share Amount, $60. A's Three Year Gain Amount is equal to A's API Three Year Distributive Share Amount, $40. Under [paragraph (a)(1)](#a-1) of this section, A's Recharacterization Amount is A's One Year Gain Amount, minus A's Three Year Gain Amount, or $20. - (ii) **Example 2: API One Year and Three Year Disposition Amounts—** - (A) **Facts.** During the taxable year, A disposes of an API that A has held for four years for a $100 gain. Additionally, A sells Distributed API Property for a $300 gain at a time when A has a two-year holding period in such property. A has no other items of long-term capital gain or loss with respect to any API in the year. - (B) **Determination of A's API One Year and Three Year Disposition Amounts.** Under [paragraph (a)(4)(i)](#a-4-i) of this section, A's API One Year Disposition Amount is $400. This amount is the sum of A's $300 of long-term capital gain on A's disposition of the Distributed API Property and A's $100 of long-term capital gain on the disposition of the API. Under [paragraph (a)(4)(ii)](#a-4-ii) of this section, A's API Three Year Disposition Amount is $100, which is the amount of long-term capital gain that A recognized upon disposition of the API held for more than three years. Under [paragraph (a)(2)](#a-2) of this section, A's One Year Gain Amount is $400 and A's Three Year Gain Amount is $100. - (C) **Determination of A's Recharacterization Amount.** Under [paragraph (a)(1)](#a-1) of this section, A's Recharacterization Amount is $300, which is the difference between A's One Year Gain Amount and Three Year Gain Amount. - (iii) **Example 3: Determination of One Year Gain Amount, Three Year Gain Amount, and Recharacterization Amount—** - (A) **Facts.** A holds an API in each of PRS1 and PRS2. With respect to PRS1, A's API One Year Distributive Share Amount is $100 and A's API Three Year Distributive Share Amount is ($200). With respect to PRS2, A's API One Year Distributive Share Amount is $600 and A's API Three Year Distributive Share Amount is $300. During the taxable year, A also has an API One Year Disposition Amount of $200 of gain. A has no other items of long-term capital gain or loss with respect to an API for the taxable year. - (B) **Determination of A's One Year Gain Amount.** Under [paragraph (a)(2)](#a-2) of this section, A's One Year Gain Amount is $900, which is an amount equal to A's $100 API One Year Distributive Share Amount from PRS1 and A's $600 API One Year Distributive Share Amount from PRS2 (a combined net API One Year Distributive Share Amount of $700) plus A's $200 API One Year Disposition Amount. - (C) **Determination of A's Three Year Gain Amount.** Under [paragraph (a)(2)](#a-2) of this section, A's Three Year Gain Amount is $100, which is equal to A's combined net API Three Year Distributive Share Amount for the taxable year (A's $200 API Three Year Distributive Share Amount loss from PRS1 plus A's API Three Year Distributive Share Amount of $300 from PRS2). A does not have an API Three Year Disposition Amount. - (D) **Determination of A's Recharacterization Amount.** Under [paragraph (a)(1)](#a-1) of this section, A's Recharacterization Amount is $800. (A's One Year Gain Amount of $900 less A's Three Year Gain Amount of $100.) - (2) **Special rules examples.** The principles of [paragraph (b)](#b) of this section are illustrated by the following examples. - (i) **Example 1: Lookthrough Rule.** On July 1, 2021, A and B form partnership PRS. At the time of PRS's formation, A agrees to provide substantial services to PRS in exchange for a 20% profits interest in PRS, and B, a partner that is an Unrelated Non-Service Partner, contributes $1 million in exchange for an interest in PRS and PRS immediately uses the capital to purchase marketable securities. On July 1, 2023, C, another Unrelated Non-Service Partner becomes legally obligated to contribute capital to PRS ($75 million) for the purposes of investing in and developing Specified Assets and is admitted into PRS. On July 3, 2023, and after C makes a contribution of $75 million, PRS uses this capital to acquire stock in portfolio company Z. On July 1, 2025, when Z has a value of $500 million and the value of the marketable securities is $2 million, A sells its API in PRS for $85.2 million. As a result of this sale, the Lookthrough Rule applies because B's contribution was non-substantial under paragraph (b)(9)(i)(A)(1) of this section. Therefore, A includes $85.2 million in its API One Year Disposition Amount and under [paragraph (b)(9)(ii)(B)](#b-9-ii-B) of this section, $200,000 (20% share of $1 million gain in marketable securities) in its API Three Year Disposition Amount. Accordingly, under [paragraph (a)(1)](#a-1) of this section, A's Recharacterization Amount is $85 million. - (ii) **Example 2: Installment sale gain.** On December 22, 2021, A disposed of A's API in an installment sale. At the time of the disposition, A had held its API for two years. A received a payment with respect to the installment sale during A's 2022 taxable year, causing A to recognize $200 of long-term capital gain. The $200 long-term capital gain recognized in 2022 is subject to [section 1061](/cfr/26/1061.md) because it is recognized after December 31, 2017. Accordingly, the $200 of long-term capital gain recognized by A in 2022 is included in A's API One Year Disposition Amount. The $200 of long-term capital gain is not in A's API Three Year Disposition Amount because the API was not held for more than three years at the time of its disposition. - (iii) **Example 3: REIT capital gain dividend.** During the taxable year, A holds an API in PRS. PRS holds an interest in REIT. During the taxable year, REIT distributes a $1,000 capital gain dividend to PRS of which 50% is allocable to A's API. Part of the capital gain dividend for the year results from [section 1231](/cfr/26/1231.md) gain. In accordance with [§ 1.1061-6(c)(1)(i)](/cfr/26/1.1061-6.md?p=c-1-i), REIT discloses to PRS the One Year Amounts Disclosure of $400, which is the $1,000 capital gain dividend reduced by the $600 of [section 1231](/cfr/26/1231.md) capital gain dividend included in that amount. Part of the One Year Amounts Disclosure for the year results from gain from property held for three years or less. In accordance with [§ 1.1061-6(c)(1)(ii)](/cfr/26/1.1061-6.md?p=c-1-ii), REIT also discloses the Three Year Amounts Disclosure of $150, which is the $400 One Year Amounts Disclosure reduced by the $250 of gain attributable to property held for three years or less. PRS includes a $200 gain in determining A's API One Year Distributive Share Amount and a $75 gain in determining A's API Three Year Distributive Share Amount. See paragraphs [(b)(5)(i)](#b-5-i) and [(ii)](#b-5-ii) of this section. - (d) **Applicability date.** The provisions of this section apply to taxable years of Owner Taxpayers and Passthrough Entities beginning on or after January 19, 2021. An Owner Taxpayer or Passthrough Entity may choose to apply this section to a taxable year beginning after December 31, 2017, provided that they apply the [Section 1061](/cfr/26/1061.md) Regulations in their entirety to that year and all subsequent years. # §1.1061-5. Section 1061(d) transfers to related persons. - (a) **In general.** If an Owner Taxpayer transfers any API or Distributed API Property, directly or indirectly, to a [Section 1061(d)](/cfr/26/1061.md?p=d) Related Person (as defined in [paragraph (e)](#e) of this section), the Owner Taxpayer must include in gross income as short-term capital gain, an amount equal to— - (1) The short-term capital gain recognized upon the API transfer without regard to this [paragraph (a)](#a); and - (2) **The lesser of—** - (i) The amount of net long-term capital gain recognized by the Owner Taxpayer upon the transfer of such interest; or - (ii) The amount treated as short-term capital gain under [paragraph (c)](#c) of this section ([Section 1061(d)](/cfr/26/1061.md?p=d) Recharacterization Amount). - (b) **Transfer.** For purposes of this section, the term transfer means a sale or exchange in which gain is recognized by the Owner Taxpayer under chapter 1 of the Internal Revenue Code. - (c) **Section 1061(d) Recharacterization Amount.** To the extent an Owner Taxpayer recognizes long-term capital gain upon a transfer of an API to a [Section 1061(d)](/cfr/26/1061.md?p=d) Related Person, the Owner Taxpayer's [Section 1061(d)](/cfr/26/1061.md?p=d) Recharacterization Amount is the amount of net long-term capital gain (excluding amounts not taken into account for purposes of [section 1061](/cfr/26/1061.md) under [§ 1.1061-4(b)(7)](/cfr/26/1.1061-4.md?p=b-7)) from assets held for three years or less that would have been allocated to the Owner Taxpayer (to the extent attributable to the transferred API) by the partnership if the partnership had sold all of its property in a fully taxable transaction for cash in an amount equal to the fair market value of such property (taking into account [section 7701(g)](/cfr/26/7701.md?p=g)) immediately prior to the Owner Taxpayer's transfer of the API. If only a portion of an Owner Taxpayer's API is transferred, this [paragraph (c)](#c) shall apply with respect to the portion of gain attributable to the transferred interest. - (d) **Special rules.** For purposes of this section, the following rules are applicable. - (1) An Owner Taxpayer will be treated as transferring the Owner Taxpayer's share of any Indirect API or Distributed API Property if the Indirect API or Distributed API Property is transferred by the API Holder to a person that is a [Section 1061(d)](/cfr/26/1061.md?p=d) Related Person with respect to the Owner Taxpayer. - (2) The rules set forth in paragraphs [(a)](#a), [(b)](#b), and [(c)](#c) of this section apply upon the transfer of a Passthrough Interest issued by an S corporation or PFIC to the extent the Passthrough Interest is treated as an API. - (e) **Section 1061(d) Related Person.** For purposes of this section, the term [Section 1061(d)](/cfr/26/1061.md?p=d) Related Person means— - (1) A person that is a member of the taxpayer's family within the meaning of [section 318(a)(1)](/cfr/26/318.md?p=a-1); - (2) A person that performed a service within the current calendar year or the preceding three calendar years in a Relevant ATB to the API transferred by taxpayer; or - (3) A Passthrough Entity to the extent that a person described in paragraph [(e)(1)](#e-1) or [(2)](#e-2) of this section owns an interest, directly or indirectly. - (f) **Examples.** The following examples illustrate the rules of this section. - (1) **Example 1: Transfer to child by gift.** A, an individual, performs services in an ATB and has held an API in connection with those services for 10 years. The API has a fair market value of $1,000 and a tax basis of $0, and no debt is associated with the API. A transfers all of the API to A's daughter as a gift. A's daughter is a [section 1061(d)](/cfr/26/1061.md?p=d) Related Person but A's gift is not a transfer as described in [paragraph (b)](#b) of this section; thus [section 1061(d)](/cfr/26/1061.md?p=d) does not apply to A's gift. However, the API remains an API in the hands of A's daughter under [§ 1.1061-2(a)(1)(i)](/cfr/26/1.1061-2.md?p=a-1-i). - (2) **Example 2: Transfer of an API to a partnership owned by Section 1061(d) Related Persons—** - (i) **Facts.** A, B, and C are equal partners in GP, a partnership. GP holds only one asset, an API in PRS1 which is an Indirect API as to each of A, B, and C. Each of A, B, and C provides services in the ATB in connection with which GP was transferred its API in PRS1. A and B contribute their interests in GP to PRS2 in a [section 721(a)](/cfr/26/721.md?p=a) exchange for interests in PRS2. - (ii) **Application of section 1061(d).** Because the contribution by each of A and B of its interest in GP to PRS2 is an exchange in which no gain is recognized by either A or B, the contribution is not a transfer as described in [paragraph (b)](#b) of this section; thus [section 1061(d)](/cfr/26/1061.md?p=d) does not apply to A's and B's contribution. However, the API remains an API in the hands of PRS2 under [§ 1.1061-2(a)(1)(i)](/cfr/26/1.1061-2.md?p=a-1-i). - (3) **Example 3: Transfer of an API to a Section 1061(d) Related Person.** A has held an API in GP, a partnership, for four years. A transfers the API to a [Section 1061(d)](/cfr/26/1061.md?p=d) Related Person described in [paragraph (e)](#e) of this section in exchange for $100 of cash, resulting in A recognizing long-term capital gain of $100. Because this is a transfer described in [paragraph (b)](#b) of this section, [section 1061(d)](/cfr/26/1061.md?p=d) applies to the transfer of A's API and A must determine its [Section 1061(d)](/cfr/26/1061.md?p=d) Recharacterization Amount under [paragraph (c)](#c) of this section. If, immediately prior to A's transfer of the API, the partnership had sold all of its assets in a fully taxable transaction for cash equal to the fair market value of the assets, A's share of the net long-term capital gain (excluding amounts not taken into account for purposes of [section 1061](/cfr/26/1061.md) under [§ 1.1061-4(b)(7)](/cfr/26/1.1061-4.md?p=b-7)) from assets held for three years or less would have been $120. Thus, A's [Section 1061(d)](/cfr/26/1061.md?p=d) Recharacterization Amount is $120. As a result, A's $100 long-term capital gain is recharacterized as short-term capital gain under [paragraph (a)](#a) of this section. The API remains an API in the hands of the [Section 1061(d)](/cfr/26/1061.md?p=d) Related Person under [§ 1.1061-2(a)(1)(i)](/cfr/26/1.1061-2.md?p=a-1-i). - (g) **Applicability date.** The provisions of this section apply to taxable years of Owner Taxpayers and Passthrough Entities beginning on or after January 19, 2021. An Owner Taxpayer or Passthrough Entity may choose to apply this section to a taxable year beginning after December 31, 2017, provided that they apply the [Section 1061](/cfr/26/1061.md) Regulations in their entirety to that year and all subsequent years. # §1.1061-6. Reporting rules. - (a) **Owner Taxpayer filing requirements—** - (1) **In general.** An Owner Taxpayer must file such information with the IRS as the Commissioner of Internal Revenue or the Commissioner's delegate (Commissioner) may require in forms, instructions, or other guidance as is necessary for the Commissioner to determine that the Owner Taxpayer has properly complied with [section 1061](/cfr/26/1061.md) and the [Section 1061](/cfr/26/1061.md) Regulations. If an Owner Taxpayer requires information from a Passthrough Entity to determine the Capital Interest Disposition Amount or the [Section 1061(d)](/cfr/26/1061.md?p=d) Recharacterization Amount, the Owner Taxpayer must request such information from that entity. - (2) **Failure to obtain information.** [Paragraph (b)(1)](#b-1) of this section requires certain Passthrough Entities to furnish an Owner Taxpayer with certain amounts necessary to determine its Recharacterization Amount and meet its reporting requirements under [paragraph (a)(1)](#a-1) of this section. To the extent that an Owner Taxpayer is not furnished the information required to be furnished under [paragraph (b)(1)](#b-1) of this section in such time and in such manner as required by the Commissioner and the Owner Taxpayer is not otherwise able to substantiate all or a part of these amounts to the satisfaction of the Commissioner, then if the information with respect to the determination of the— - (i) API One Year Distributive Share Amount under [§ 1.1061-4(a)(3)(i)](/cfr/26/1.1061-4.md?p=a-3-i) is not furnished, the API One Year Distributive Share Amount will not be reduced by— - (A) Amounts not taken into account for purposes of [section 1061](/cfr/26/1061.md) under [§ 1.1061-4(b)(7)](/cfr/26/1.1061-4.md?p=b-7); or - (B) Capital Interest Gains and Losses as determined under [§ 1.1061-3(c)(2)](/cfr/26/1.1061-3.md?p=c-2). - (ii) API Three Year Distributive Share Amount determined under [§ 1.1061-4(a)(3)(ii)](/cfr/26/1.1061-4.md?p=a-3-ii) is not furnished, all items included in the API One Year Distributive Share Amount are treated as items that would not be treated as long-term capital gain or loss, if three years is substituted for one year in paragraphs (3) and (4) of section 1222. - (b) **Passthrough Entity filing requirements and reporting—** - (1) **Requirement to file information with the IRS and to furnish information to API Holder.** A Passthrough Entity must file such information with the IRS as the Commissioner may require in forms, instructions, or other guidance as is necessary for the Commissioner to determine that it and its partners have complied with [section 1061](/cfr/26/1061.md) and the [Section 1061](/cfr/26/1061.md) Regulations. A Passthrough Entity that has issued an API must furnish to the API Holder, including an Owner Taxpayer, such information at such time and in such manner as the Commissioner may require in forms, instructions, or other guidance as is necessary to determine the One Year Gain Amount and the Three Year Gain Amount with respect to an Owner Taxpayer that directly or indirectly holds the API. A Passthrough Entity that has furnished information to the API Holder must file such information with the IRS, at such time and in such manner as the Commissioner may require in forms, instructions, or other guidance. This information includes: - (i) The API One Year Distributive Share Amount and the API Three Year Distributive Share Amount (as determined under [§ 1.1061-4](/cfr/26/1.1061-4.md)); - (ii) Capital gains and losses allocated to the API Holder that are excluded from [section 1061](/cfr/26/1061.md) under [§ 1.1061-4(b)(7)](/cfr/26/1.1061-4.md?p=b-7); - (iii) Capital Interest Gains and Losses allocated to the API Holder (as determined under [§ 1.1061-3(c)](/cfr/26/1.1061-3.md?p=c)); and - (iv) In the case of a disposition by an API Holder of an interest in the Passthrough Entity during the taxable year, upon the request of an API Holder, any information required by the API Holder to properly take the disposition into account under [section 1061](/cfr/26/1061.md), including— - (A) Information necessary to apply the Lookthrough Rule and to determine the API Holder's Capital Interest Disposition Amount; and - (B) **Information necessary to determine an Owner Taxpayer's Section 1061(d) Recharacterization Amount.** - (2) **Requirement to request, furnish, and file information in tiered structures—** - (i) **Requirement to request information.** If a Passthrough Entity requires information to meet its reporting and filing requirements under this section (in addition to any information required to be furnished to the Passthrough Entity under [paragraph (b)(1)](#b-1) of this section) from a lower-tier entity in which it holds an interest, the Passthrough Entity must request such information from that entity. - (ii) **Requirement to furnish and file information.** If information is requested of a Passthrough Entity under [paragraph (b)(2)(i)](#b-2-i) of this section, the Passthrough Entity must furnish the requested information to the person making the request but only to the extent the information is necessary for the requesting Passthrough Entity to meet its reporting and filing requirements under this section or is required by the Commissioner in forms, instructions, or other guidance. If the person requesting the information is an API Holder in the Passthrough Entity, the information is furnished under [paragraph (b)(1)](#b-1) of this section. If the Passthrough Entity requesting the information is not an API Holder, the Passthrough Entity must furnish the information to the requesting Passthrough Entity as required by the Commissioner in forms, instructions, or other guidance. - (iii) **Timing of requesting and furnishing information—** - (A) **Requesting information.** A Passthrough Entity described in [paragraph (b)(2)(i)](#b-2-i) of this section must request information under [paragraph (b)(2)(i)](#b-2-i) of this section by the later of the 30th day after the close of the taxable year to which the information request relates or 14 days after the date of a request for information from an upper-tier Passthrough Entity. - (B) **Furnishing information—** (1) In general. Except as provided in paragraph (b)(2)(iii)(B)(2) of this section, requested information must be furnished by the date on which the entity is required to furnish information under [section 6031(b)](/cfr/26/6031.md?p=b) or under [section 6037(b)](/cfr/26/6037.md?p=b), as applicable. (2) Late requests. Information with respect to a taxable year that is requested by an upper-tier Passthrough Entity after the date that is 14 days prior to the due date for a lower-tier Passthrough Entity to furnish and file information under [section 6031(b)](/cfr/26/6031.md?p=b) or [section 6037(b)](/cfr/26/6037.md?p=b), as applicable, must be furnished and filed in the time and manner prescribed by forms, instructions and other guidance. - (iv) **Manner of requesting information.** Information may be requested electronically or in any manner that is agreed to by the parties. - (v) **Recordkeeping requirement.** Any Passthrough Entity receiving a request for information must retain a copy of the request and the date received in its books and records. - (vi) **Passthrough Entity is not furnished information to meet its reporting obligations under paragraph (b)(1) of this section.** If an upper-tier Passthrough Entity holds an interest in a lower-tier Passthrough Entity and it is not furnished the information described in [paragraph (b)(1)](#b-1) of this section, or, alternatively, if it has not been furnished information after having properly requested the information under this [paragraph (b)(2)](#b-2), the upper-tier Passthrough Entity must take actions to otherwise determine and substantiate the missing information. To the extent that the upper-tier Passthrough Entity is not able to otherwise substantiate and determine the missing information to the satisfaction of the Commissioner, the upper-tier Passthrough Entity must treat these amounts as provided under [paragraph (a)(2)](#a-2) of this section. The upper-tier Passthrough Entity must provide notice to the API Holder and the IRS regarding the application of this [paragraph (b)(2)](#b-2) to the information being reported as required in forms, instructions, and other guidance. - (vii) **Filing requirements.** Both the Passthrough Entity requesting the information and the Passthrough Entity furnishing the information must file all information with the IRS as the Commissioner may require in forms, instructions, or other guidance. - (viii) **Penalties.** In addition to the requirement in [section 1061(e)](/cfr/26/1061.md?p=e) that the Secretary shall require reporting (at the time and in the manner prescribed by the Secretary) as is necessary to carry out the purposes of this section, the information required to be furnished under this [paragraph (b)](#b) is also required to be furnished under sections [6031(b)](/cfr/26/6031.md?p=b) and [6037(b)](/cfr/26/6037.md?p=b). Failure to report as required under this [paragraph (b)](#b) will be subject to penalties under [section 6722](/cfr/26/6722.md). - (c) **Regulated investment company (RIC) and real estate investment trust (REIT) reporting—** - (1) **Section 1061 disclosures.** A RIC or REIT that reports or designates a dividend, or part thereof, as a capital gain dividend, may, in addition to the information otherwise required to be furnished to a shareholder, disclose two amounts for purposes of [section 1061](/cfr/26/1061.md)— - (i) **One Year Amounts Disclosure.** The One Year Amounts Disclosure of a RIC or REIT is a disclosure by the RIC or REIT of an amount that is attributable to a computation of the RIC's or REIT's net capital gain, excluding capital gain and capital loss not taken into account for purposes of [section 1061](/cfr/26/1061.md) under [§ 1.1061-4(b)(7)](/cfr/26/1.1061-4.md?p=b-7). The aggregate amounts provided in the One Year Amounts Disclosures with respect to a taxable year of a RIC or REIT must equal the lesser of the RIC's or REIT's net capital gain, excluding any capital gains and capital losses not taken into account for purposes of [section 1061](/cfr/26/1061.md) under [§ 1.1061-4(b)(7)](/cfr/26/1.1061-4.md?p=b-7), for the taxable year or the RIC's or REIT's aggregate capital gain dividends for the taxable year. - (ii) **Three Year Amounts Disclosure.** The Three Year Amounts Disclosure of a RIC or REIT is a disclosure by the RIC or REIT of an amount that is attributable to a computation of the RIC's or REIT's One Year Amounts Disclosure substituting “three years” for “one year” in applying [section 1222](/cfr/26/1222.md). The aggregate amounts provided in the Three Year Amounts Disclosures with respect to a taxable year of a RIC or REIT must equal the lesser of the aggregate amounts provided in the RIC's or REIT's One Year Amounts Disclosures substituting “three years” for “one year” in applying [section 1222](/cfr/26/1222.md) for the taxable year or the RIC's or REIT's aggregate capital gain dividends for the taxable year. - (2) **Pro rata disclosures.** The One Year Amounts Disclosure and Three Year Amounts Disclosure made to each shareholder of a RIC or REIT must be proportionate to the share of capital gain dividends reported or designated to that shareholder for the taxable year. - (3) **Report to shareholders.** A RIC or REIT that provides the [section 1061](/cfr/26/1061.md) disclosures described in paragraphs [(c)(1)(i)](#c-1-i) and [(ii)](#c-1-ii) of this section must provide those [section 1061](/cfr/26/1061.md) disclosures in writing to its shareholders with the statement described in [section 852(b)(3)(C)(i)](/cfr/26/852.md?p=b-3-C-i) or the notice described in [section 857(b)(3)(B)](/cfr/26/857.md?p=b-3-B) in which the capital gain dividend is reported or designated. - (d) **Qualified electing fund (QEF) reporting.** A passive foreign investment company with respect to which the shareholder has a QEF election (as described in [section 1295(a)](/cfr/26/1295.md?p=a)) in effect for the taxable year that determines net capital gain as provided in [§ 1.1293-1(a)(2)(i)(A)](/cfr/26/1.1293-1.md?p=a-2-i-A), as limited by [section 1293(e)(2)](/cfr/26/1293.md?p=e-2), may provide some or all of the information listed in [paragraph (b)(1)](#b-1) of this section (and any other relevant information) to its shareholders to enable API Holders to determine the amount of their inclusion under [section 1293(a)(1)](/cfr/26/1293.md?p=a-1) that would be included in the API One Year Distributive Share Amounts and API Three Year Distributive Share Amounts. To the extent that such information is not provided, [paragraph (a)(2)](#a-2) of this section will apply except that Owner Taxpayers are not permitted to separately substantiate the information. An API Holder who receives the additional information described in this [paragraph (d)](#d) must retain such information as required by [§ 1.1295-1(f)(2)(ii)](/cfr/26/1.1295-1.md?p=f-2-ii). - (e) **Applicability date.** The provisions of this section apply to taxable years of Owner Taxpayers and Passthrough Entities beginning on or after January 19, 2021. An Owner Taxpayer or Passthrough Entity may choose to apply this section to a taxable year beginning after December 31, 2017, provided that they apply the [Section 1061](/cfr/26/1061.md) Regulations in their entirety to that year and all subsequent years.