SECTION 6. EXAMPLES

The following facts apply for all of the examples below:

SP is an individual with a calendar year taxable year. PRS is a partnership with a calendar year taxable year. Except as otherwise stated, PRS ’s partnership agreement provides for all partnership items to be allocated to the partners in proportion to the partners’ interests in the partnership. PRS ’s partnership agreement provides that the partners’ capital accounts will be determined and maintained in accordance with § 1.704–1(b)(2)(iv), that liquidation proceeds will be distributed in accordance with the partners’ positive capital account balances, and that any partner with a deficit balance in the partner’s capital account following the liquidation of the partner’s interest must restore that deficit to the partnership. All allocations and distributions to all parties are not recast under § 707(a)(2), and § 751(b) does not apply to any distribution. The partnership, its members, and the service providers elect the Safe Harbor provided in section 4 of this revenue procedure and file all affected returns consistent with the Safe Harbor, and each partnership interest transferred constitutes a Safe Harbor Partnership Interest under section 3.02 of this revenue procedure. The issuance of the partnership interest in each example is not required to be capitalized under the rules of § 263 or other applicable provision of the Code. In examples in which the partnership interest transferred to the service provider is not substantially vested, there is not a plan that the service provider will forfeit the partnership interest.

(1) Example 1: Substantially Vested Profits Inter- est

Facts : PRS has two partners, A and B, each with a 50% interest in PRS . On March 1, 2005, SP agrees to perform services for the partnership in exchange for a partnership interest. Under the terms of the partnership agreement, SP is entitled to 10% of the future profits and losses of PRS, but is not entitled to any of the partnership’s capital as of the date of transfer.

equal to the liquidation value of that interest. For this purpose, liquidation value is determined without regard to any lapse restriction (as defined at § 1.83–3(i)) and means the amount of cash that the recipient of the Safe Harbor Partnership Interest would receive if, immediately after the transfer, the partnership sold all of its assets (including goodwill, going concern value, and any other intangibles associated with the partnership’s operations) for cash equal to the fair market value of those assets and then liquidated.

.03 Vesting . Under the Safe Harbor, a Safe Harbor Partnership Interest is treated as substantially vested if the right to the associated capital account balance equivalent is not subject to a substantial risk of forfeiture or the interest is transferable. A Safe Harbor Partnership Interest is treated as substantially nonvested only if, under the terms of the interest at the time of the transfer, the interest terminates and the holder may be required to forfeit the capital account balance equivalent credited to the holder under conditions that would constitute a substantial risk of forfeiture, and the interest is not transferable. For these purposes, the capital account balance equivalent is the amount of cash that the recipient of the Safe Harbor Partnership Interest would receive if, immediately prior to the forfeiture, the interest vested and the partnership sold all of its assets (including goodwill, going concern value, or any other intangibles associated with the partnership’s operations) for cash equal to the fair market value of those assets and then liquidated. Notwithstanding the previous sentence, a Safe Harbor Partnership Interest will not be considered substantially nonvested if the sole portion of the capital account balance equivalent forfeited is the excess of the capital account balance equivalent at the date of termination of services over the capital account balance equivalent at the end of the prior partnership tax year or any later date before the date of termination of services.

.04 Forfeiture Subsequent to § 83(b) Election . If a Safe Harbor Partnership Interest with respect to which a § 83(b) election has been made is forfeited, the service provider must include as ordinary income in the taxable year of the forfeiture an amount equal to the excess, if any, of (1) the amount of income or gain that the partnership would be required to al

locate to the service provider under proposed § 1.704–1(b)(4)(xii) if the partnership had unlimited items of gross income and gain, over (2) the amount of income or gain that the partnership actually allocated to the service provider under proposed §1.704–1(b)(4)(xii).