Unlock eSignature Licitness for Your General Partnership Agreement

How to eSign a document: eSignature licitness for General Partnership Agreement

all right so the last topic of this discussion is going back to section 721 the general rule of non-recognition of gain or loss when a partner contributes property right that's has that has a inherent gain or loss in there right remember it's gain or loss a proper it had to be property but what if you have services if you have services that rule does not apply that general rule not recognition now if you do have services if you are if you are partners contributing services in exchange for an interest you have to distinguish between a capital and profits interest so first i want to before i give you the rules the distinction i want to distinguish what they are economically a profit a profits interest just means that you do not have any capital when you receive the interest or ever so if there's a hypothetical immediate liquidation a profits interest holder gets nothing because there's no liquidation value versus a capital interest is the opposite of that you actually have a capital balance you have to contribute capital so profits interest means that okay when the com when the partnership get gets profits later on in the future you're going to share in those profits a capital interest means that you do have a capital value so you have to share profits and losses and upon liquidation you actually do get your capital value back so those of you that are accounting students out there you might remember that for partnership accounting when we allocate liquidation the last step is always based on capital now historically there's been some changes in the law with respect to this there was a diamond case a case called diamond and campbell which talked about um you had to distinguish between the two and the rev proc did the same thing and the and the rev uh both rev procs they did the same thing now rev proc 2001-43 also said that um a section 83b election now reprop 2001-43 basically came in and said that you don't have to do a section 83 of the election i don't want to get into that that's a little bit beyond the scope of this um but i just want to mention that so the current rule is under the proposed regulations now i know the proposed but that's the safe harbor that we use and the proposed regulations do not distinguish they treat capital interests and profits interests the same so they do not distinguish so there's not a distinction so the reason i brought the distinction earlier is because again the rules used to be you distinguish now you don't so propose regulations would reverse the rule but allow a safe harbor so we use these today even though they're proposed and they're not they're not final regulations because it's a safe harbor they came about in the um in the 2000s so there we we go ahead we don't distinguish between capital profits interest we go ahead and we include the value at the time it's received at its liquidation value all right so the important part here is that a capital interest when received is basically going to be its liquidation value and there's other ways to look at this which the regulations specify but that's generally speaking going to be the hypothetical liquidation what you would get if the if the partnership liquidated when you receive the amount now the partnership gets a corresponding deduction with respect to paying for these services just so you know that's important now that's for capital interest for profits interest as i said a profits interest under um the definition economically there is no liquidation value no liquidation value so when a profit's interested you see the general rule is that you include nothing but you do include profits so we include profits as the receipt so you inc so the basically the profits interest holder would include profits has received but when the profits interest holder receives the actual partnership interest they do not have to include that value because the value is going to be zero so it is it is a taxable event but it's going to be zero now there's a few times where the value is actually going to be um not zero so if you go back to the previous slide we still apply the rules of rev proc 93-27 where these three a substantial certain um income stream it's sold within two years or a limited partnership interest and publicly traded partnership these things actually will have value a profits interest so the the term for profit economics is um pi profits interest does have value so that would be value so where it's not zero so i'll put does not equal zero you actually have to value it so substantially a certain income stream is where um there's a partnership that might have like a really long like a 20-year lease and like real property and it's had that for a long time it's very secure so within two years so you basically have to go back to your year and you have to um amend it and then limited partnership interest there's a value on that so that's the key is that profits interest is hard to value it's all about valuation is the key valuing valuation is tough right um but in certain cases it can be value so i'm going to stop there again the section 83b election portion is something that an advanced topic you might consider but i'm not going to discuss it here so that really ends the discussion of contributions to partnerships