1. A537 - Corporate & Partnership Tax Instructor: Dwight Drake

2. A537 - Corporate & Partnership Tax Instructor: Dwight Drake

3. A537 - Corporate & Partnership Tax Instructor: Dwight Drake

4. A537 - Corporate & Partnership Tax Instructor: Dwight Drake

5. Rev. Proc. 93-27 – Cleaning Up Diamond’s Mess
General Rule: No taxable event if person receives profits interest in partnership in return for services in a partner capacity or in anticipation of being a partner.
Exceptions:
1. “Substantially certain and predictable income stream from partnership asset” – “high-quality” debt securities or “high quality” lease.
Partner sells profits interest within two years.
Publicly-traded partnership
A537 - Corporate & Partnership Tax Instructor: Dwight Drake

6. A537 - Corporate & Partnership Tax Instructor: Dwight Drake
Problem 82
C offered 1/3 interest in future profits of AB partnership. No contribution required. No taxable event. Rev. Proc
(a) C given 1/10 nonforfeitable profits interest in AB partnership that owns $1 mill building to manage facility. Not taxable under Rev. Proc so long as income stream is not “substantially certain and predictable” from “high quality” net lease. C management need suggests no such lease here.
(b) What if C rendered prior financing and tenant rental services? If profits interest for past services, then taxable under 61. Tough valuation issue. Key would be to document not for past services.
A537 - Corporate & Partnership Tax Instructor: Dwight Drake

7. A537 - Corporate & Partnership Tax Instructor: Dwight Drake
Problem 82
(c) C sells profits interest for 50k within one year. Sale within two years kills protection under IRS will say taxed on receipt of interest - value 50k.
(d) Partnership impact: C has 50k income; Partnership has 50k deduction allocable to A & B. May need to be capitalized and amortized over financing period or tenant lease period. Also, consistent with capital interest approach, may be viewed as sale of future income interest for 50k. If so, A & B have 50k gain (basis 0) which wipes out deduction. Not yet advanced by IRS.
(e) What if profits interest subject to forfeiture under 83? If not taxable event under Rev. Proc , section 83 forfeiture not factor. Also, 83(b) election moot issue. Just not taxable.
A537 - Corporate & Partnership Tax Instructor: Dwight Drake