IRS clarifies Rev. Proc. on partnership interest for services.

• Author: Tapajna, Joseph J.
• Position: Partners & Partnerships

Rev. Proc. 2001-43 addresses the treatment of a grant of a substantially nonvested profit interest for services, clarifying Rev. Proc. 93-27. Under Rev. Proc. 93-27, the grant of a partnership profits interest for services is generally not taxed to the service provider, but the grant of a capital interest for services is. The time for determining whether a profits or capital interest has been granted is the time of receipt. The testing date for substantially nonvested profits interests has been unclear. Under Rev. Proc. 2001-43, the taxability of a receipt of a substantially nonvested profits interest is determined at the same time as a vested profits interest (i.e., at the time of receipt) if the taxpayer satisfies three requirements.

Practitioners have questioned whether the safe harbor in Rev. Proc. 93-27 applied to a receipt of a substantially nonvested profits interest, Rev. Proc. 2001-43 treats the grant of this interest just like a grant of a vested profits interest, if (1) the partnership and service provider treat the latter as a partner from the grant date of the substantially nonvested profits interest, (2) no one takes a deduction for such interest and (3) the taxpayer satisfies the Rev. Proc. 93-27 requirements. Service providers subject to Rev. Proc. 2001-43 do not have to file Sec. 83(b) elections.

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