Profits interest in partnership taxable to service partner

Article Abstract:

The Tax Court has held in its Campbell decision that a receipt from a partnership of an interest in future profits in exchange for services is immediately taxable. The decision reverses the previous treatment of service partners in which profit interests were not taxed until the distributive share of the profits from the partnership were paid. The taxpayer had argued that the interest he received was an interest in future profits and should not be considered income until profits, if any, were realized. The taxpayer cited Section 721(a) in which interests received for contributions of property are not recognized as income. The Court held that services are not property and therefore taxpayers contributing services to a partnership must report compensation received in exchange as income.

Profit, Profits

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Distributions of appreciated property need not result in gain to the distributing corporation

Article Abstract:

Under the 1984 Deficit Reduction Act, the nonrecognition of gain rule has been replaced by the general recognition rule, and a new exception from recognition treatment for qualified dividends is provided. A dividend distribution from appreciated property is not taxable for the distributee if the property was used by a corporation in a qualified business and was not accounts receivable or inventory in the course of trade for services or inventory assets. Thus, in this and other situations, more dividends create gain at the corporate level, although there are methods by which a corporation can avoid gain on the distribution of appreciated property.

Dividends, Distribution

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Structuring a partner's retirement to achieve the best results for partner and partnership

Article Abstract:

Elimination of preferential tax rates on capital gains under the Tax Reform Act of 1986 makes partnership interest liquidation much more desirable than direct sale. The lack of a capital gains differential means that a withdrawing partner is taxed at the same rate, whether payment is made under Section 736(a), Section 736(b), or if remaining partners make direct purchase. Aggregate tax bite is lessened if payments are made according to Section 736(a), but such flexibility is allowed only with respect to partnership interest liquidation, and is not available when a retiring partner sells an interest to a new or remaining partner.

Economic aspects, Liquidation

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