Question

C, an experienced real estate manager, receives a non-forfeitable 10% profits interests in the AB general partnership, whose sole asset is a commercial building with a value of $1,000,000 in return for his agreement to render management services in his capacity as a partner. Net rentals from the building recently have been averaging $100,000 per year. C has been asked to manage the building in the hope that his expertise will increase the rental and ultimately lead to a profitable sale of the property.

(a) What are the tax consequences to C upon receipt of the profits interest?

(b) What are the tax consequences to C upon receipt of the profits interest if C, prior to becoming a partner, rendered services to the partnership in connection with obtaining financing and soliciting tenants for the building?

(c) What result in (a), above, if C sells his profits interest for $50,000 within one year of acquiring the interest and prior to receiving any profits?

(d) What results in (c), above, to the partnership (and A and B)?

(e) What result to C and to the partnership in (a), above, if C’s profits interest was subject to forfeiture until C rendered services for the partnership for a period of 5 years?

Answer 1