Compensation & Benefits Alert - February 2014
A recent Tax Court decision, Crescent Holdings LLC v. Commissioner, 141 TC No. 15, Dec. 2, 2013, highlights several significant implications when a partnership issues equity compensation to service providers. This case emphasizes the substantially different tax consequences resulting from the issuance of capital interests compared with profits interests in connection with the performance of services to a partnership. Under existing statutory, regulatory, and administrative guidance, the issuance of unvested profits interests is subject to “special” treatment whereas the issuance of unvested capital interests is subject to the general rules of section 83. This distinction can have a material impact on the allocation of taxable income to the holder of an unvested interest in the partnership.