Contribution of Services

A partner can acquire an interest in partnership capital or profits as compensation for services performed or to be performed.

Capital interest. A capital interest is an interest that would give the holder a share of the proceeds if the partnership’s assets were sold at FMV and the proceeds were distributed in a complete liquidation of the partnership. This determination is generally made at the time of receipt of the partnership interest. The FMV of such an interest

received by a partner as compensation for services must generally be included in the partner’s gross income in the first tax year in which the partner can transfer the interest or the interest is not subject to a substantial risk of forfeiture. The capital interest transferred as compensation for services is subject to the rules for restricted property discussed under Employee Compensation in Pub. 525, Taxable and Nontaxable Income.

The FMV of an interest in partnership capital transferred to a partner as payment for services to the partnership is a guaranteed payment, discussed earlier under Guaran- teed Payments .

Profits interest. A profits interest is a partnership interest other than a capital interest. 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 being a partner, the receipt of such an interest is not a taxable event for the partner or the partnership. However, this doesn’t apply in the following situations.

• The profits interest relates to a substantially certain and predictable stream of income from partnership assets, such as income from high-quality debt securities or a high-quality net lease.

• Within 2 years of receipt, the partner disposes of the profits interest.

• The profits interest is a limited partnership interest in a publicly traded partnership.

A profits interest transferred as compensation for services is not subject to the rules for restricted property that apply to capital interests.