CCA 1348012: Counsel outlines profits-interest and partnership-interest issues

Plain-English summary

Chief Counsel provided initial reactions to a case involving profits interests and partnership interests transferred for services. The message explains the safe harbor in Rev. Proc. 93-27, as clarified by Rev. Proc. 2001-43, and notes that proposed regulations under IRC § 83 had not been finalized. Counsel identified factual questions about whether the safe harbor applied, including a possible disposition within two years, the recipient's capacity as a partner or employee, and whether the interest represented a predictable income stream. If the safe harbor did not apply, counsel suggested analyzing whether the interest was a bona fide partnership interest, whether a section 83 transfer occurred, whether fair market value was paid, and whether section 409A concerns arose.

Ruling snapshot

• Question: How should profits-interest and partnership-interest transfers for services be analyzed under the applicable safe harbors and IRC § 83?
• Outcome: advice given
• Key authorities: IRC §§ 83 and 409A; Rev. Proc. 93-27; Rev. Proc. 2001-43; Treas. Reg. § 1.701-2(e); Notice 2005-43

Full text (IRS public release)

ID:       CCA_2013071210312415
Office: ------------------------
UILC:     83.00-00
Number: 201348012
Release Date: 11/29/2013
From: ---------------------
Sent: Friday, July 12, 2013 10:31:25 AM
To: -------------------
Cc: ---------------
Subject: --------


--------here are some initial reactions to the case. Please let us know if you would like to
discuss.

As you may know, Rev. Proc. 93-27, as clarified by Rev. Proc. 2001-43, provides guidance on the
treatment of profits interests. Proposed regs under section 83 (and related Notice 2005-43)
regarding profits interests were released in 2005, but they will only be effective for transfers on
or after the date the final regs are published.

As background, RP 93-27 provides that if a person receives a profits interest for providing
services to or for the benefit of a partnership in a partner capacity or in anticipation of
becoming a partner, the receipt of the interest is not a taxable event for the partner or the
partnership. This safe harbor does not apply if (1) the profits interest relates to a substantially
certain and predictable stream of income from partnership assets, (2) within two years after
receipt, the partner disposes of the profits interest or (3) the profits interest is an interest in a
“publicly-traded partnership.” Also, presumably, if services are performed in someone’s
capacity as an employee and not in his partner capacity, the safe harbor does not apply. Some
of the case law predating RP 93-27 taxed compensatory transfers of profits interests, and
whether the individual recipient was acting in his capacity as a partner appears to have been
part of the analysis.

RP 2001-43 clarifies 93-27, providing that the determination under 93-27 of whether an interest
granted to a service provider is a profits interest is, under certain circumstances, tested at the
time the interest is granted, even if, at that time, the interest is substantially nonvested.
Accordingly, where a partnership grants a profits interest to a service provider in a transaction
meeting the requirements of Rev. Proc. 2001-43 and Rev. Proc.-93-27, neither the grant of the
interest nor the event that causes the interest to become substantially vested is a taxable event. RP 2001-43 also provides that “[t]axpayers to which this revenue procedure applies
need not file an election under section 83(b) of the Code” in order to be treated as having
received the interest.

2

The proposed regulations released in 2005 provide that a partnership interest is property
within the meaning of 83 and that the transfer of a partnership interest in connection with the
performance of services is subject to 83. Also, if a partnership interest is transferred in
connection with the performance of services, and if an election under 83(b) is not made, then
the holder of the interest would not be treated as a partner until the interest becomes
substantially vested. (Contrary to RP 2001-43, under which the recipient of an unvested
partnership profits interest can be treated as a partner, even if no 83(b) election is made,
provided that certain conditions are met.) Also, the FMV of partnership interests will be based
on liquidation value. Note that this guidance has not been finalized, so taxpayers can still rely
on RP 93-27 and RP 2001-43.

Therefore, the first question is whether the safe harbor of RP 93-27 and RP 2001-43 applies.
This is a question for ----. If the safe harbor applies, then there is no issue for -------. However,
there are some facts suggesting the safe harbor may not apply, such as the exchange for the A
units (possibly a disposition within 2 years), whether the partnership interest was received in a
partner capacity (the interest may have been received in an employee capacity), and whether the
partnership interest was in return for a predictable stream of income.

If the safe harbor does not apply, then the question would be whether the interest in the LLC
(partnership) is a bona fide partnership interest. If the other entities are just funneling cash to
this entity based on the results of their activities, this doesn't seem like a bona fide partnership.
This again, however, is a question for ----. -----may look into whether the anti-
abuse provision in the partnership regs (1.701-2(e)) is applicable here. If it is a bona fide
partnership, then there is a section 83 transfer, and we'd have to look at whether the
employees paid FMV. If it is not a bona fide partnership interest, we'd have to look at whether
there are 409A concerns.

So at this point, we need ---- to make the initial determinations. Do you know who in-----has
been assigned to assist the ----attorney? If so, we can coordinate with the-----attorney.