Tuesday, November 29, 2005
Martin J. McMahon, Jr. (Florida) has published Recognition of Gain by a Partnership Issuing an Equity Interest for Services: The Proposed Regulations Get It Wrong, 109 Tax Notes 1161 (Nov. 28, 2005), also available on the Tax Analysts web site as Doc 2005-23275, 2005 TNT 228-18. Here is the abstract:
This special report discusses one aspect of the proposed regulations dealing with the exchange of a partnership interest for services. The proposed regulations would provide complete nonrecognition of gain or loss to the partnership issuing a partnership interest for services, while allowing a deduction for the full fair market value of the partnership interest granted to the service partner. This special report explains that the proposed regulations are wrong in that regard. In light of the legislative history and statutory structure, § 721 simply cannot be read to provide nonrecognition to a partnership that admits a service- provider partner with a capital account that is transferred in exchange for services. Either the transaction must be a recognition event or the partnership's deduction (or capitalized amount) must be limited to a pro rata portion of the partnership's aggregate basis for its assets.