Tax Court - Undistributed partnership income allocations 

December 2:  The U.S. Tax Court today issued an opinion in a case concerning partnership income allocations, and concluded that a partner and CEO who resigned before a 2% interest had vested was not to have been allocated any partnership profits or losses for the years at issue. Crescent Holdings, LLC v. Commissioner 141 T.C. No. 15 (December 2, 2013)

Instead, the Tax Court held that the partnership profits or losses associated with the 2% interest ought to be allocated on a pro rata basis to the other partners.

Read the Tax Court opinion [PDF 173 KB]: Crescent Holdings

The following brief description is from extracted the Tax Court’s “headnotes” summary.


  • Holdings was a limited liability company formed on September 7, 2006, and classified as a partnership for federal income tax purposes.
  • Resources was a limited liability company whose ownership was transferred to Holdings on September 7, 2006.
  • Also on September 7, 2006, Resources entered into an employment agreement with the taxpayer to have Holdings transfer a 2% interest in Holdings to the taxpayer served as chief executive officer (CEO) of Resources for a period of three years ending on September 7, 2009. The 2% interest was subject to a substantial risk of forfeiture and was not transferable.
  • Holdings allocated partnership profits and losses attributable to the 2% interest to the CEO for tax years 2006 and 2007. The taxpayer included these amounts in gross income for the years at issue.
  • The taxpayer resigned as CEO and forfeited his right to the 2% interest before it vested.

Issues before the Tax Court

At issue for the Tax Court were the following issues:

  • Was the taxpayer to be treated as a partner owning a 2% interest in Holdings for purposes of allocating its profits and losses for the tax years 2006 and 2007?
  • If not, how were the profits and losses attributable to the 2% interest to be allocated to the other partners?

Tax Court’s conclusions

The Tax Court held—

  • The 2% interest is a partnership capital interest, not a partnership profits interest and that Rev. Proc. 93-27 and Rev. Proc. 2001-43 were not applicable because they apply only to partnership profits interests.
  • Section 83 applies to a nonvested partnership capital interest transferred in exchange for the performance of services.
  • Under Reg. section 1.83-1(a)(1), the undistributed partnership income allocations attributable to the nonvested 2% partnership capital interest are to be recognized in the income of the transferor.
  • Holdings was the transferor of the 2% partnership capital interest. The undistributed partnership allocations attributable to the 2% capital interest are allocable to the partners holding the remaining interest in Holdings.

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