C is not taxable upon admission to the partnership this is simply an interest

C is not taxable upon admission to the partnership

This preview shows page 21 - 23 out of 98 pages.

C is not taxable upon admission to the partnership; this is simply an interest in a share of future earnings. (2) C, an experienced real estate manager, receives a nonforfeitable 1/10 th profits interest in the AB general partnership, whose sole asset is a commercial building with a value of $1,000,000 in return for his agreement to render management services in his capacity as a partner. Net rentals from the building recently have been averaging $100,000 per year. C has been asked to manage the building in the hope that his expertise will increase the rental income and ultimately lead to a profitable sale of the property. (a) What are the tax consequences to C upon receipt of the profits interest? C will not be taxable upon the receipt of the profits interest unless (1) the profits interest relates to a substantially certain and predictable stream of income from the partnership assets; (2) if within2 years of receipt, the partner disposes of the profits interest; or (3) if the profits interest is a limited partnership interest in a publicly traded partnership within the meaning of §7704. The 3 conditions do not appear to be present in this problem. (b) What are the tax consequences to C upon receipt of the profits interest if C, prior to becoming a partner, rendered services to the partnership in connection with obtaining financing and soliciting tenants for the building? Under Rev. Proc. 93-27, the receipt of a profits interest in exchange for services in a partner capacity or in anticipation of being a partner, will not be treated as a “taxable event unless one of three conditions is met. Accordingly, since the services were performed in anticipation of becoming a partner in the partnership and the conditions are not present in this problem, the receipt of the profits interest will not be taxable to C. (c) What result in (a) above if C sells his profits interest for $50,000 within 1 year of acquiring the interest and prior to receiving any profits?
Image of page 21
One of the prohibited conditions under Rev. Proc. 93-27 is met. Accordingly, C’s receipt of the profits interest will be treated as a taxable event. However, because the sale occurred within year 1 and proceeds from the sale ($50,000) equal C’s basis ($50,000), C will not recognize gain. (d) What result in (c), above, to the partnership (and to A and B)? Maule has no clue what the result to the partnership. (e) What result to C and to the partnership in (a) above, if C’s profits interest was subject to forfeiture until C rendered services for the partnership for a period of 5 years? C is receiving a substantially nonvested profits interest. According to Rev. Proc. 2001- 43, the receipt of a substantially nonvested profits interest is not taxable on receipt or vesting of that interest if: (1) the person is treated as a partner from the outset; (2) the person reports his distributive share of income, gain, loss, deduction, and credit; (3) upon the grant of the interest or at the time the interest becomes substantially vested, neither the partnership or the partners deduct any amount as wages, compensation, or otherwise; and none of the Rev. Proc. 93-27 exceptions apply.
Image of page 22
Image of page 23

You've reached the end of your free preview.

Want to read all 98 pages?

  • Spring '14
  • JamesE.Maule
  • basis, Types of business entity, partner

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture

  • Left Quote Icon

    Student Picture