Rev' Proc' 9327 Cleaning Up Diamonds Mess

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Rev. Proc. 93-27 Cleaning Up Diamonds 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

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Problem 82

• C offered 1/3 interest in future profits of AB
  partnership. No contribution required. No
  taxable event. Rev. Proc. 93-27.
• (a) C given 1/10 nonforfeitable profits interest
  in AB partnership that owns 1 mill building to
  manage facility. Not taxable under Rev. Proc.
  93-27 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.

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Problem 82

• (c) C sells profits interest for 50k within one
  year. Sale within two years kills protection
  under 93-27. 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. 93-27, section 83 forfeiture not
  factor. Also, 83(b) election moot issue. Just
  not taxable.