Final Regulations Issued on Treatment of Carried Interests

Rushing to completion before the change in Administration, on January 7, 2021, the IRS and Treasury issued final regulations (the “Final Regulations”) under IRC Sec. 1061 (“Partnership Interests Held in Connection with Performance of Services”), added to the Internal Revenue Code (“IRC” or “Code”) by the 2017 Tax Cuts and Jobs Act (“TCJA”). IRC Sec. 1061 recharacterizes certain net long-term capital gains of a partner that holds one or more applicable partnership interests (“APIs,” generally referred to as carried interests) as short-term capital gains by applying a three-year holding period instead of a one-year holding period. The Final Regulations (T.D. 9945) provide additional guidance to address some of the comments that were received on the proposed regulations (“Proposed Regulations”) published on August 14, 2020. (See the EisnerAmper Alert on the Proposed Regulations (REG-107213-18).) Although Treasury and the IRS attempted to provide clarity to the statutory language under IRC Sec. 1061, and to the Proposed Regulations, issues remain unresolved. Treasury and the IRS continue to study many of those issues.

The preamble to the Final Regulations – specifically, its “Summary of Comments and Explanation of Revisions” -- is divided into five parts. Part I provides an overview of the statutory provisions and defined terms used in the Proposed and Final Regulations. Part II describes the primary changes made to the Proposed Regulations. These changes relate to four principal areas – (i) the capital interest exception; (ii) the treatment of capital interests acquired with loan proceeds; (iii) the “look-through” rule for certain API dispositions; and (iv) transfers of APIs to IRC Sec. 1061(d) related persons. Part III discusses additional comments received and revisions made in other areas of the Proposed Regulations. Part IV summarizes comments received on issues related to IRC Sec. 1061 that are beyond the scope of the regulations and are under study. Lastly, Part V discusses applicability dates for the Final Regulations.

Background/Overview

Recharacterization Amount/Definition of API

IRC Sec. 1061 recharacterizes as short-term capital gain the difference between a taxpayer’s net long-term capital gain with respect to one or more APIs and the taxpayer’s net long-term capital gain with respect to these APIs if such long-term capital gain is calculated utilizing a three-year holding period rather than a one-year holding period. This difference is referred to as the “Recharacterization Amount.”

An API is an interest in a partnership’s profits which, directly or indirectly, is transferred to or held by a taxpayer in connection with the performance of “substantial” services by the taxpayer, or any other related person, in any applicable trade or business (“ATB”). IRC Sec. 1061 applies to all partnership interests that meet the definition of an API, regardless of whether the receipt of an interest satisfies the “profits or carried interest” safe harbor (Rev. Proc. 93-27 and Rev. Proc. 2001-43) under which the IRS does not treat the receipt of a profits interest as a taxable event.

While an API can be held directly by an owner taxpayer (“Owner Taxpayer”) – the person who is subject to federal income tax on the Recharacterization Amount -- it may also be held indirectly through one or more pass-through entities (“Pass-through Entities”). The regulations provide a framework for determining the Recharacterization Amount when an API is held through one or more tiers of Pass-through Entities. Each Pass-through Entity in a tiered structure is treated as holding an API (“API Holder”). An API Holder may be an individual, partnership, trust, estate, S corporation or a passive foreign investment company (“PFIC”) with respect to which the shareholder has a qualified electing fund (“QEF”) election in effect.

API gains and losses do not include –

• Long-term capital gain determined under IRC Sec. 1231 and IRC Sec. 1256
• Qualified dividends
• Any other capital gain that is characterized as long-term or short-term without regard to the holding period rules of IRC Sec. 1222 (e.g., capital gain characterized under the identified mixed straddle rules)
• Any amounts that otherwise are treated as ordinary income under any Code section, including IRC Sec. 751 and IRC Sec. 1245
• Capital interest gains and losses (i.e., long-term capital gains and losses with respect to an API Holder’s capital investment in a Pass-through Entity)

Observation: Some commenters requested that IRC Sec. 1231 Gains be included under API Gains and Losses. Thankfully, Treasury did not agree.

Definition of an ATB

For an interest in a partnership to be an API, the interest must be held or transferred in connection with the performance of services in an ATB. An ATB is defined as any activity conducted on a regular, continuous, and substantial basis which consists, in whole or in part, of raising or returning capital and either (i) investing in (or disposing of) specified assets (or identifying specified assets for such investing or disposition) or (ii) developing “specified assets.” An activity is conducted on a regular, continuous, and substantial basis if the total level of activities meets the level of activity required to establish a trade or business under IRC Sec. 162 (“Trade or Business Expenses”). Specified assets are securities, commodities, real estate held for rental or investment, cash or cash equivalents, options or derivative contracts with respect to the foregoing, as well as an option or derivative contract on a partnership interest to the extent that the partnership interest represents an interest in other specified assets. Developing specific assets takes place, for example, if it is represented to investors, lenders, regulators, or others that the value, price, or yield of a portfolio business may be enhanced in connection with choices or actions of a service provider or of others acting in concert with or at the direction of a service provider.

Observation: See discussion in part III below about the definition of “specified asset.”

Interests in a partnership may be issued to a service provider in anticipation of the service provider providing services to an ATB, but because an ATB does not exist at the time of the transfer, the interest is not an API. Once the service provider is providing services in an ATB, the interest becomes an API; at that point, its status as an API does not depend on whether the ATB continues to meet the ATB activity test.

Exceptions to API

API does not include the following:

• Any interest in a partnership directly or indirectly held by a corporation. For this purpose, an S corporation is not treated as a corporation. A PFIC, which is a corporation, with which a taxpayer has in place a QEF election is also not included in this exception.
• Certain capital interests, e.g., long-term capital gains and losses that represent a return on an API Holder’s invested capital in a Pass-through Entity (“Capital Interest Gains and Losses”). This is referred to as the “capital interest exception.”
• Certain partnership interests held by employees of entities that are not engaged in an ATB.
• An API that is acquired by a bona fide purchaser who (i) does not provide services, (ii) is unrelated to any service provider and (iii) acquired the interest for fair market value.

Primary Changes to the Proposed Regulations

Capital Interest Exception

Under IRC Sec. 1061(d)(4)(B), an API does not include “any capital interest in the partnership which provides the taxpayer with a right to share in partnership capital commensurate (editor’s note – our bold) 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.” The statute does not provide guidance on what is meant by a right to share in partnership capital commensurate with the amount of capital contributed. The Final Regulations replace the Proposed Regulations requirement that allocations be made to all partners in the same manner with a requirement that an allocation to an API Holder, with respect to its capital interest, must be determined and calculated in a similar manner to the allocations with respect to capital interests held by similarly situated “Unrelated Non-Service Partners” who have made significant aggregate capital contributions. Unrelated Non-Service Partners are partners who do not (and did not) provide services in the relevant ATB and who are not related parties with respect to any API Holder in the partnership or any person who provides or has provided services in the relevant ATB. For these purposes, a significant aggregate capital contribution is one that is equal to five percent or more of the aggregate capital interest balance of the partnership at the time the allocations are made.

Another area that Treasury and the IRS address involves the reliance on IRC Sec. 704(b) capital accounts under a partnership agreement to be used as a measure of obtaining a capital interest allocation. Venture capital, private equity, and hedge fund managers saw this as a risk, considering that they would likely not be able to use the capital interest exception in its proposed form. The reliance on IRC Sec. 704(b) capital accounts would put them at a disadvantage because using the IRC Sec. 704(b) capital accounts would not properly reflect the economic significance of how they make their allocations. Treasury and the IRS agreed and moved away from a reliance on IRC Sec. 704(b) capital accounts for purposes of the capital interest exception; in order to be respected as a capital interest allocation, the allocation must be commensurate with capital contributed in order to qualify for the capital interest exception.

Additional changes to the Proposed Regulations addressed in the Final Regulations under this section include the following:

• Allocations and distribution rights with respect to an API Holder’s capital interest and the capital interest of Unrelated Non-Service Partners who have made significant aggregate capital contributions must be reasonably consistent. These factors are retained from the Proposed Regulations and extend to allocations made through tiered structures.
• The similar manner test may be applied on both an investment-by-investment basis or on the basis of allocations made to a particular class of interest.
• The terms “pass-through capital allocation,” “pass-through interest capital allocation,” and “pass-through interest direct investment allocation” are removed, relying on “capital interest allocation” to incorporate these terms.
• Capital interest allocations retain their character when allocated to an upper-tier partnership with respect to such partners' capital interests in a manner that is respected under IRC Sec. 704(b) (taking in account the principles of IRC Sec. 704(c)).

The next area under the capital interest exception in which Treasury and the IRS provide guidance attempts to add clarity to the Unrelated Non-Service Partner requirement and, in the eyes of Treasury and the IRS, closely align the capital interest exception to standard industry practice. The Final Regulations retain the requirement that capital interest allocations to an API Holder be compared to capital interest allocations made to Unrelated Non-Service Partners who have a significant capital account balance including the five percent threshold. The five percent threshold is met when the Unrelated Non-Service Partner owns five percent or more of the aggregate capital account balance of the partnership at the time the allocations are made. Treasury and the IRS contend that the five percent threshold adequately insures that there is significant comparison to meet the statutory exception that an API does not include a capital interest which provides the API Holder with a right to share in partnership capital commensurate with the amount of capital contributed. Treasury and the IRS also provide that this provision may be applied on an investment-by-investment or class-by-class basis. Contributed capital must be clearly identified under both the partnership agreement and in the partnership’s books and records as separate and apart from allocations made to the API Holder with respect to its API and specify that the books and records must be contemporaneous. Treasury and the IRS believe this is the correct approach because it shows that the partnership's Unrelated Non-Service Partners considered these allocations a valid return on their contributed capital. Since under this provision there are no grandfathering or transition rules that exist, it may be prudent for partnerships to consult with counsel to consider whether or not their current partnership agreement and books and records clearly reflect the Final Regulations. Allocations made to an API that do not meet these requirements will not be considered a capital interest allocation.

Observation: The comparison to Unrelated Non-Service Partners still allows for the API Holder to not have to charge itself a management fee even though the Unrelated Non-Service Partner is subject to a management fee. Similarly, an allocation to an API Holder will not fail if an API Holder has a right to receive tax distributions while the Unrelated Non-Service Partners do not have such a right, where such distributions are treated as advances against future distributions.

Treasury and the IRS also provide guidance clarifying the determination of an API Holder's “Capital Interest Disposition Amount” (defined below) when the API Holder transfers a Pass-through Entity interest that is comprised of both an API and a capital interest at a gain and would be allocated only capital loss as a capital interest allocation if all of the assets of the Pass-through Entity had been sold for their fair market value in a fully taxable transaction immediately before the interest transfers. In this case, the Final Regulations provide that all of the long-term capital gain attributable to the interest transfer is API gain. Conversely, if the API Holder recognizes long-term capital loss on the transfer of a Pass-through Entity interest and would be allocated only capital gain as a capital interest allocation if all of the assets of the Pass-through Entity had been sold for their fair market value in a fully taxable transaction immediately before the interest transfer, the Final Regulations provide that all of the long-term capital loss attributable to the interest transfer is API loss. The Capital Interest Disposition Amount is the amount of long-term capital gain or loss recognized on the sale or disposition of all or a part of a Pass-through Entity interest that is treated as a capital interest gain or loss. In general, long-term capital gain or loss recognized on the sale or disposition of a Pass-through Entity interest is deemed to be API gain or loss unless it is determined under the Final Regulations to be a Capital Interest Disposition Amount. Like the Proposed Regulations, the Final Regulations provide steps for determining the Capital Interest Disposition Amounts.

Lastly, Treasury and the IRS stress that “Unrealized API Gains and Losses” are not included in capital interest gains and losses. Unrealized API Gains and Losses are, with respect to a Pass-through Entity’s assets, all unrealized gains and losses that would be (i) realized if those assets were disposed of for fair market value in a taxable transaction on the relevant date and (ii) allocated to an API Holder with respect to its API, taking into account IRC Sec. 704(c) principles. The Final Regulations also clarify that if an API Holder is allocated API gain by a Pass-through Entity, to the extent that an amount equal to the API gain is reinvested in a Pass-through 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 Pass-through Entity), the amount will be treated as a contribution to the Pass-through Entity for a capital interest that may produce capital interest allocations for the API Holder, provided such allocations otherwise meet the requirements to be a capital interest allocation. In addition, the Final Regulations remove the mandatory revaluation rules that were provided by the Proposed Regulations and adopt comments received in reference to the Proposed Regulations that Unrealized API Gains and Losses be determined according to the existing rules governing unrealized gains and losses, including IRC Sec. 704(c) principles.

Observation: While perhaps not intended, under the Final Regulations it seems that the earnings on the capital account of an Owner Taxpayer attributable to the Unrealized API Gains and Losses earned (what we refer to in the profession as earnings on the unrealized incentive) are themselves API Gains and Losses. It is troubling that the term “relevant date” is not further clarified in the regulations. Treasury should distinguish between a hedge fund-style incentive where the incentive is ”earned” on the increase in net asset value and crystalizes at year-end and a PE fund-style incentive where incentive is only earned on liquidation of the investments with regard to the capital interest exception.

Treatment of Capital Interests Acquired with Loan Proceeds

Under the Proposed Regulations, a capital account for a prospective partner that is funded by a loan or advance made or guaranteed by the partnership, partner or related person would not be included in the contributing partner’s capital account for capital interest allocation purposes. Only the repayments on such loan would be included in the contributing partner’s capital account, as long as the proceeds were not sourced from a similar borrowing arrangement.

Commenters criticized this treatment, arguing that the exclusion of such loan proceeds to fund a partner’s capital account is out of touch with normal business practices and creates a barrier of entry for service partners. For example, many fund managers will offer employees the ability to invest in their investments by assisting the employees with internal loans or guarantee the loans to third-party lenders. Commenters did acknowledge that the purpose of the rule was to prevent the general partner from seeking loans from limited partners or the partnership in order to avoid IRC Sec. 1061 application and fit within the capital interest exception.

The Final Regulations retain much of the Proposed Regulations, but include a provision that will allow an allocation to be considered a capital interest allocation if the loan is considered a “recourse liability” to the individual service provider under all of the following conditions –

• The loan or advance is fully recourse to the individual service provider
• The individual service provider has no right to reimbursement from any other person
• The loan or advance is not guaranteed by any other person

Look-Through Rule on Sale of APIs

The Final Regulations address the “look-through” rule on the sale of an API with a holding period of three years or more. The IRS is concerned with the potential abuse of general partners using existing partnerships with a holding period of at least three years or forming API entities three years in advance of receiving substantial capital to receive carry allocations for services performed. This would create an abuse in order to benefit from long-term capital gain rates on sales or exchanges while the underlying assets generating the carried interest did not achieve the three-year holding period required under IRC 1061(a).

The Proposed Regulations included a limited look-through rule that applied to the sale of an API that has been held for more than three years at the time of the disposition. That look-through rule only applied if 80% or more of the value of the assets held by the partnership at the time of the API disposition are assets held for three years or less that would produce capital gain or loss subject to IRC Sec. 1061 if disposed of by the partnership. Commenters argue that this makes sense if the API is a direct owner of the API or controlled the API; however, for tiered structures this would be extremely burdensome and at times impossible to determine. Treasury acknowledged and agreed that it would be an extreme hardship for tiered entities and simplified the look-through rules.

The Final Regulations retain the look-through rule but limit its application. The Final Regulations state that the look-through rule applies when there is a sale of an API interest held for three years or more and (i) the API would have a holding period of three years or less if the holding period of an Unrelated Non-Service Partner that has an obligation to legally contribute a substantial amount (at least 5% of the partnership’s total capital contributions) of money or property to the Pass-through Entity the API is related to does not exceed three years; or (ii) a transaction or series of transactions has taken place with a principal purpose of avoiding potential gain recharacterization under IRC Sec. 1061(a). The look-through rule similarly applies with respect to a Pass-through Entity interest issued by an S corporation or a PFIC to the extent the Pass-through Entity interest is treated as an API.

Observation: It is refreshing when Treasury is able to write a rule that speaks specifically to the perceived abusive transaction. This more limited look-through rule makes sense. With regard to S corporations and PFICs, there are still practitioners who feel that Treasury is out of its bounds when the plain letter of the law requires a different interpretation.

Transfers of API to a Related Party

The Proposed Regulations under Reg. Sec. 1.1061-5 provide for recharacterization of certain long-term capital gain as short-term capital gain when a taxpayer transfers an API to an IRC Sec. 1061(d) related person. The term “transfer” includes, but is not limited to, contributions, distributions, sales, exchanges and gifts -- regardless of whether the gain is otherwise recognized on the transfer under the Code. The taxpayer must include in gross income as short-term capital gain the excess of: (i) the net built-in long-term capital gain in assets attributable to the transferred interest with a holding period of three years or less, over (ii) the amount of long-term capital gain recognized on the transfer that is treated as short-term capital gain under IRC Sec. 1061(a) on the transfer. For this purpose, a related person includes (i) a member of the taxpayer's family (spouse, children, grandchildren, and parents), (ii) those who provided services in the applicable trade or business within the current or the preceding three calendar years; or (iii) in the case of a Pass-through Entity, a person described above who owns an interest, directly or indirectly.

Commenters questioned whether this section should be interpreted as an acceleration provision or merely a recharacterization provision. The broad definition of what “transfer” means combined with the overriding of nonrecognition treatment could lead to significant, adverse tax impacts on transferors as well as otherwise uninvolved, passive interest holders in a variety of transactions. In addition, the commenters expressed uncertainty regarding the scope of transfers subject to IRC Sec. 1061(d).

After considering the comments, Treasury and the IRS concluded it is more appropriate to apply IRC Sec. 1061(d) only to transfers in which long-term capital gain is recognized under the Code. The term “transfer” means a sale or exchange in which gain is recognized by the taxpayer under the Code. Accordingly, under the Final Regulations, IRC Sec. 1061(d) operates as a recharacterization provision providing that the recharacterization amount includes only long-term capital gain that the taxpayer recognizes under the Code upon a transfer through a sale or exchange of an API to a Sec. 1061(d) related person.

The Final Regulations provide the following examples:

Example 1: Transfer to a child by gift

A, an individual, performs services in an ATB and has held an API in connection with those services for ten 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 an IRC Sec. 1061(d) related person but A’s gift is not a transfer as described in Reg. Sec. 1.1061-5(b); thus, IRC Sec. 1061(d) does not apply to A’s gift. However, the API remains an API in the hands of A’s daughter under Reg. Sec. 1.1061-2(a)(1)(i).

Example 2: Transfer of an API to a partnership owned by IRC Sec. 1061(d) Related Persons

1. 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 A, B, and C. A, B, and C each 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 an IRC Sec. 721(a) exchange for interests in PRS2.
2. Application of IRC Sec. 1061(d). Because the contribution by A and B of their 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 Reg. Sec. 1.1061-5(b); thus, IRC Sec. 1061(d) does not apply to A and B’s contribution. However, the API remains an API in the hands of PRS2 under Reg. Sec. 1.1061-2(a)(1)(i).

Observation: Final Regulations do away with the notion that a transfer to a related party should be a gain acceleration event as the interest would still be an API in the hands of the transferee so acceleration is unnecessary. Instead IRC Sec. 1061(d) has been interpreted as a recharacterization provision if the transfer is a taxable event.

Additional Comments Received and Revisions Made

As with Part II, Part III of the preamble to the Final Regulations discusses additional comments some of which resulted in changes and others which were not adopted. Of note are the following comments:

• The Final Regulations retain the Proposed Regulations’ presumption that all services provided for a partnership interest are substantial services for purposes of IRC Sec. 1061, although Treasury and the IRS may at some point in the future provide a safe harbor for circumstances under which the presumption will not apply.
• The definition of “specified assets” remains unchanged. Commenters requested additional guidance on the treatment of a partnership engaged in the production, storage, transportation, processing or marketing of physical commodities in the ordinary course of business, that such business not be treated as engaged in “investing or developing actions.” Treasury agreed to further study but made no current changes. Interestingly, there were no comments asking for clarification about a partnership (such as a PE fund) that holds only operating partnerships in its portfolio as this would not seem to fall under the definition of specified assets in Reg. Sec. 1.1061-1(a)(5)(v). Under that provision, a partnership interest would be deemed to be a specified asset only to the extent that the partnership holds a specified asset.
• Under the “unrelated purchaser exception,” some commenters wanted Treasury to clarify that the exception applies both to a direct purchase of an API and an indirect purchase of an API, through an upper-tier partnership. Commenters also asked for clarification that the exception continues to apply even if a lower-tier partnership (presumably a new API) comes into existence after the purchase. Treasury did not adopt these comments because of the complexity of administering the above exception through tiers of Pass-through Entities.
• Additionally, commenters asked for Treasury to clarify that an interest in an API acquired through contribution to a partnership as opposed to an outright purchase could also be excluded from the definition of API. Treasury responded that the intention was to include such a partnership contribution and as such it is not excluded (although a partnership contribution that is deemed to be a disguised sale (via a subsequent distribution) should be considered a sale for these purposes because such transaction would not qualify for non-recognition under IRC Sec. 721(a)). Attorneys and practitioners need to be aware of this nuance so that they can structure the purchase of an API properly.
• The definition of “API One-Year Distributive Share Amount” was changed to allow this amount to go negative (rather than not going below zero as in the Proposed Regulations) which would then lower the amount necessary for recharacterization. In addition, the Final Regulations provide that 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 needs to be re-characterized.
• If an API distributed property (Distributed API Property (“DAPIP”)), the DAPIP would still be an API interest and the holding period in the hands of the Owner Taxpayer needs to be tracked. Treasury clarified that if the DAPIP would have given rise to a type of long-term capital gain that is not subject to IRC Sec. 1061, as is the case with IRC Sec. 1256 property had the underlying partnership sold this security, the fact that it becomes DAPIP does not now require the gain on disposition to be included in the API One Year Disposition Amount of the Owner Taxpayer.
• Also clarified is that DAPIP is no longer considered DAPIP if sold by the Owner Taxpayer after attaining a three-year holding period.
• With regard to PFICs, Treasury clarified that the amount included in the “API One-Year Distributive Share Amount” is limited to the QEF’s earnings and profits (E&P). Treasury did not clarify how to allocate the E&P between ordinary and short-term capital gain items, one-to-three- year long-term capital gain and greater than three-year long-term capital gain property, and for the moment taxpayers may adopt any reasonable method. Further, the Final Regulations provide that if a QEF does not provide the Owner Taxpayer with necessary information (i.e., one-to-three-year gain amount) the entire amount of long-term capital gain must be included as One-Year Gain Amount. Or as the preamble states “ the entire amount of the Owner Taxpayers one year QEF net capital gain is also included in the subtrahend of its API Three Year Distributive Share Amount formula.”
• Some commenters requested that IRC Sec. 1231 gain be included in IRC Sec. 1061. The Final Regulations do not adopt that suggestion, and as such IRC Sec. 1231 gain is excluded.
• The Proposed Regulations had included a transition rule that permitted a taxpayer to elect to exclude from API gains and losses capital gains and losses from assets held for more than three years as of January 1, 2018. Several commenters questioned the need for an elective transition rule, and accordingly, this rule was removed from the Final Regulations. 

Additional Areas Under Study

Part IV of the preamble discusses Treasury’s intention to study the following:

• IRC Sec. 1061(b) – “to the extent provided by the Secretary, section 1061(a) shall not apply to income or gain attributable to any asset not held for portfolio investment on behalf of third party investors” – This is the so called “family office exception.” While some fundamental changes were made with regard to the capital interest exception and the look-through rules (discussed above), as those rules relate to IRC Sec. 1061(b), Treasury is still studying this provision.
• Small Partnerships – Treasury and the IRS are studying whether there is a simple method that can be used by small partnerships in calculating API gain or loss.

Applicability Dates

In general, the Final Regulations apply to taxable years of Owner Taxpayers and Pass-through Entities beginning on or after the date of publication of the Final Regulations in the Federal Register (subject to certain exceptions for S corporations and PFICs). An Owner Taxpayer or Pass-through Entity may choose to apply the Final Regulations in their entirety to a taxable year beginning after December 31, 2017, provided that they consistently apply the Final Regulations in their entirety to that year and all subsequent years.