Rev. Proc. 2001-43 clarifies treatment of a grant of substantially nonvested partnership profits interest.

• Author: Sair, Edward A.
• Position: IRS guidance

In Rev. Proc. 2001-43, the IRS provides guidance on the treatment of the grant of a substantially nonvested partnership profits interest to a service provider. The new procedure clarifies Rev. Proc. 93-27, by addressing the impact of vesting on the receipt of a partnership interest. According to Rev. Proc. 2001-43, the Service would not treat the grant of such an interest (or an event that causes such an interest to become substantially vested) as a taxable event for the partner or the partnership if the requirements of the new revenue procedure and Rev. Proc. 93-27 were met.

When Is an Interest Taxable?

According to Rev. Proc. 93-27, unless otherwise provided, if a person receives a profits interest for the provision of services to (or for) the benefit of a partnership in a partner capacity or in anticipation of being a partner, the IRS will not treat the receipt of the interest as a taxable event for the partner or the partnership. For this purpose, a "profits interest" is a partnership interest other than a capital interest, and "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 (FMV) and the proceeds distributed in a complete partnership liquidation. The determination as to whether an interest is a profits interest or a capital interest generally is made at the time of receipt of the partnership interest.

Rev. Proc. 93-27 did not address the impact of the vesting of a partnership interest. Consequently, Rev. Proc. 2001-43 clarifies that the determination of whether an interest granted to a service provider is a profits interest is, under the circumstances described, tested at the time the interest is granted, even if, at that time, the interest is substantially nonvested (within the meaning of Regs. Sec. 1.83-3(b))...