No, not Karl Marx. This is the story of Crescent Holdings, LLC, Arthur W. Fields and Joleen H. Fields, A Partner Other Than The Tax Matters Partner, 141 T. C. 15, filed 12/2/13, another romp through the wonderful world of TEFRA, FPAA, and the alleged collision between Section 721 and Section 83.

Question presented- Did Art get a capital interest or an income interest? And if the interest was subject to substantial risk of forfeiture, when did he get whatever he got?

Art was running real estate deals for a subsidiary of Duke Power. Duke sold out to a slew of Morgan Stanley hedge funds, and Art got a 2% piece of the LLC wherein Duke kept the balance of its interest, along with the fundies.

But Art had to stick around at the helm of the LLC for three years, or else his interest was forfeit, and he made no Section 83 election to recognize the FMV of what he got in Year One.

Nevertheless, Art got two hefty K-1s for profits he never got. He paid the tax thereon for each year, but yelped that he got no cash. So the LLC fronted him the money to pay the taxes.

Whereupon the LLC started to go south, Art bailed before the magic three years, and the DIP brought an AP in Bankruptcy Court to claw back the cash they paid Art. Art settled, and then petitioned the FPAA that said he was a partner.

The DIP intervened in the Tax Court case, claiming what Art got was an income interest, not a capital interest.

No, says Judge Ruwe, it was capital. Read the Agreement, as amended. If the LLC liquidated the minute after Art signed the deal, he was entitled to a distribution out of capital.

And Section 721 applies to property, not services. What Art provided was services, not property. But Section 83 covers property for services where the right to that property is subject to substantial risk of forfeiture. Art’s 2% never vested; there was a substantial risk.

As for any conflict between Section 721 and Section 83, here’s Judge Rowe: “Section 83 governs the timing of income recognition when property is transferred in exchange for services. Section 721 provides that the contribution of property to a partnership in exchange for an interest in the partnership is a nonrecognition event for the partner and partnership. Section 83 does not conflict with section 721.” 141 T. C. 15, at p. 39.

“Since petitioner forfeited his right to the 2% interest before it substantially vested, he never owned the interest. Petitioner never received any of the economic benefits from the undistributed partnership income allocations to the 2% interest. Requiring petitioner to recognize the partnership allocations in his income is inconsistent with the fact that he received no economic benefit from the allocations. When petitioner’s interest was forfeited to Crescent Holdings, his right to the 2% interest and to receive any benefit from the partnership income allocations reverted to Crescent Holdings.” 141 T. C. 15, at p. 46 (Footnotes omitted).

So the tax on the 2% piece belonged to the LLC, not Art. He never got nothin’.