ACCT6921 - Profits Interest Notes.docx - Profits Interest The IRS has ruled that the receipt of the right is not taxable if 1 The partnership does not

ACCT6921 - Profits Interest Notes.docx - Profits Interest...

This preview shows page 1 - 3 out of 15 pages.

Profits Interest: The IRS has ruled that the receipt of the right is not taxable if: 1. The partnership does not have a substantially certain and predictable stream of income; 2. The interest is held two years; and 3. The partnership interest is not publicly traded. (Rev. Proc. 93-27) The occurrence of the event that causes the interest to become substantially vested also will not be taxable if the above three requirements are met and the following three are also met: 1. The partnership and the service provider treat the service provider as a partner from the date the interest is granted, and the service provider recognizes his or her distributive share of partnership income, gain, loss, deduction, and credit in computing income tax liability for the entire period during which the service provider has the interest; 2. Neither the partnership nor any of the partners take any deductions for fair market the value of the interest, either upon the grant of the interest or at the time that the interest becomes substantially vested; 3. The conditions stated in Rev. Proc. 93-27 are satisfied. (Rev. Proc. 2001-43) Results to Service Partner: Under the proposed rules, if a partnership interest is transferred in connection with the performance of services, the fair market value of the interest will be treated as a guaranteed payment to the recipient service partner. It will immediately be included in her income if the partnership interest is vested ( Prop. Reg. Sec. 1.721-1(b)(4)). On the other hand, if the partnership interest is not vested, then the recipient of the partnership interest is not treated as a partner (and will not generally recognize items of partnership income or loss) unless the recipient makes an election to immediately be taxed on the value of the interest under section 83(b) (Prop. Reg. Sec. 1.761-1(b)). Results to Partnership: Under the proposed regulations Code Sec. 721 does not apply to the transfer of a partnership interest in exchange for services. Such exchanges will instead be considered a transfer of property to which Code Sec. 83 applies ( Prop. Reg. Sec. 1.721-1(b)(1)), whether a profits interest or a capital interest is exchanged. Under Code Sec. 83, no gain or loss (on, for example, the underlying partnership property) will generally be recognized by the partnership in such an exchange when the compensatory partnership interest is either transferred (or substantially vested) or forfeited (Prop. Reg. Sec. 1.721-1(b)(2)). In fact, the partnership will treat the partnership interest transferred (for services rendered) as a guaranteed payment for services under Code Sec. 707(c). Like any other guaranteed payment for services, the partnership (1) will be allowed a deduction for the value of the partnership interest transferred, unless the nature of the services is such that their payment would be capitalized , and (2) will be required to recognize income if the partnership interest is forfeited (Reg. Sec. 1.83-6(c)). The partnership will be able to deduct the guaranteed payment in the partnership tax year in which or with which ends the taxable year of the service provider in which he included the guaranteed payment in income (Code Sec. 83(b)).
Image of page 1
Diamond sold his profits interest for $40,000. “The Tax Court held that the receipt of this type of interest
Image of page 2
Image of page 3

You've reached the end of your free preview.

Want to read all 15 pages?

  • Spring '14
  • DanielL.Schisler
  • partner, Promissory note, commissioner

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern

Stuck? We have tutors online 24/7 who can help you get unstuck.
A+ icon
Ask Expert Tutors You can ask You can ask You can ask (will expire )
Answers in as fast as 15 minutes