141 T.C. No. 15
T.C.2013Background
- Crescent Holdings issued FPAAs for 2006 and 2007 adjusting income and allocated items to petitioner based on a 2% interest.
- Petitioner’s 2% Crescent Holdings interest was created at formation in September 2006 with Duke Ventures owning 98%.
- Petitioner did not vest the 2% interest and later forfeited it upon resignation before the three-year anniversary.
- Petitioner was taxed on undistributed income allocations tied to the nonvested interest under proposed Rev. Proc. 93-27/2001-43 and section 83 unless protected.
- Court considered whether petitioner’s 2% interest was a capital or profits interest and who, as transferor, must recognize undistributed partnership income from that interest.
- Holding: petitioner is not the owner of the 2% interest for 2006–2007; income allocations from the 2% interest are allocated pro rata to Duke Ventures and MSREF.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Was petitioner a Crescent Holdings partner for 2006–2007 | Fields never vested, so he was not a partner. | Holding's allocations treated him as partner under TEFRA/§6226. | No; petitioner not a partner for those years. |
| Capital vs profits interest under Rev. Proc. 93-27/2001-43 | Petitioner’s interest was a profits interest not subject to §83. | Petitioner had a capital interest entitled to liquidation proceeds. | Petitioner’s interest classified as a capital interest; Rev. Proc. 93-27/2001-43 not controlling for this analysis. |
| Who is the transferor for §83 purposes | Transferor should be petitioner even if nonvested. | Crescent Holdings or Duke Ventures as transferor based on formation agreements. | Crescent Holdings was the transferor; allocations to petitioner are allocated pro rata to Duke Ventures and MSREF. |
| Tax treatment of undistributed allocations tied to nonvested interest | Undistributed income allocations should not be taxed to petitioner. | Under §§83/721, service-based transfers may trigger income recognition. | Undistributed allocations are income to the transferor, not petitioner. |
| Effect of forfeiture on tax liability and allocations | Forfeiture negates any income tax liability from the forfeited interest. | Tax consequences follow §83 and the ownership/transferor framework. | No tax liability allocated to petitioner from forfeited interest; allocations go to other partners. |
Key Cases Cited
- Alves v. Commissioner, 734 F.2d 478 (9th Cir. 1984) (section 83 applies to property transfers beyond stock)
- Campbell v. Commissioner, 943 F.2d 815 (8th Cir. 1991) (profits vs capital interest and taxation of service transfers)
- Tigers Eye Trading, LLC v. Commissioner, 138 T.C. 67 (2012) (jurisdiction and partnership item allocation under TEFRA)