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Abstract
In May 2005, the IRS issued REG-105346-03 and a proposed revenue procedure concerning the tax consequences of a transfer of a partnership interest to a person who provides services to the partnership. The proposed regulations recite that the transfer of a partnership interest by the partnership to a service provider is treated as a guaranteed payment. However, the proposed regulations would not treat such a transfer as a guaranteed payment for purposes of subchapter K. The proposed regulations would apply the rules of Section 83 in determining the timing of the inclusion of the value of the partnership interest in the service provider's income and the deduction or increase in basis for the partnership. The proposed revenue procedure would provide guidance as to whether a partnership interest is substantially vested for purposes of Section 83. A safe harbor partnership interest would be 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. Under the proposed regulations, the transfer of property subject to Section 83 in connection with the performances of services to a partnership would not be an allocable cash basis item. The proposed regulations also would provide guidance concerning the allocation of partnership items on the forfeiture of a compensatory partnership interest for which a Section 83(b) election had been made.