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Question 4

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B.H. O’Biden has considerable experience as a leasing agent for
residential rental properties. He is disappointed, though, as he believes
his present employer does not adequately compensate him for his
work. !his does not make him unique or even close to unique."
Harry #elosian #roperties not a publicly traded partnership" has
o$ered %r. O’Biden a position handling leasing activities for a new
limited partnership that is being formed to construct and mange three
apartment complexes in &outhern 'alifornia. Harry #elosian #roperties
is willing to hire O’Biden for a minimum of two years to lease and
manage their properties, but the partnership is unable to pay the
()**,*** salary O’Biden requires. # Harry #elosian #roperties believes
if it pays him ()**,***, it will impair its ability to pay necessary cash
distributions to its limited partners.
Harry #elosian #roperties is willing to pay O’Biden a (+*,*** salary for
two years, increasing to a market salary thereafter. Harry #elosian
#roperties is also willing to allow O’Biden to purchase a )*, interest in
the limited partnership. Of course, O’Biden cannot a$ord the required
(-.,*** capital contribution.
!he partnership expects to have income and cash /ows from
operations of approximately (-**,*** per year. !he annual cash /ows
will be distributed to the partners each year during the estimated
seven0year holding period of the properties.
Harry #elosian #roperties has approached you for the assistance in
structuring a mutually satisfactory arrangement. 1ou are aware that a
partner can be awarded an interest in the future pro2ts of a
partnership and have learned from a colleague that in -**., the 34&
issued a notice and proposed 4egulations that outline procedures for
structuring an interest to avoid current taxation of the expected future
pro2ts. 1ou are also aware of a -**) 5otice and a )667 4evenue
#rocedure that provide additional guidance in this area. 8inally,
because you are really terri2c, you know there is much discussion
about this issue at the present time in 'ongress, particularly and
recently by 9avid camp. 1ou also know that this discussion has been
on0going seemingly forever."
)" 1ou suggested that :ach &amuels #roperties could grant O’Biden a
)*, interest in the limited partnership;s future pro2ts.
a. <ntil the regulations are 2nali=ed, the 34& indicates that 4ev.
#roc. 670-> remains the authority for determining taxation of a
pro2ts interest received in exchange for services. ?hat
requirements must the pro2ts interest meet to be nontaxable
under this revenue procedure@
b. <nder 5otice -**.0A7, what actions must the partnership take to
ensure the pro2ts interest is nontaxable@ ?hat is the tax result
for receipt of a nonforfeitable future pro2ts interest@
c. Harry #elosian #roperties has an interest in making sure that
O’Biden remains with the company and wants to attach a three0
year forfeiture clause to the pro2ts interest. 3n other words, if
O’Biden leaves the company within three years, his pro2ts
interest is terminated. ?hat additional considerations arise
under 5otice -**.0A7 if the pro2ts interest is not fully vested@
d. Bnd as always, what about proposed or threatened legislation
9avid 'amp C carried interests"@
e. ?hat are the advantages and disadvantages of this structure to
each party@
-" 1ou will need slides to enhance your presentation.