In Uncategorized on 05/03/2023 at 16:41

Noel Coward’s 1942 classic gives me today’s title. Getting a partnership interest in exchange neither for cash nor property, but for services rendered or to be rendered is taxable to the recipient per Section 721, unless Rev. Proc. 93-27, 1993-2 C.B. 343, intervenes. That promulgation provides that if only a profits interest, and not a capital interest, is bestowed on the servant, no taxable gain results.

A profits interest supposes that, were the partnership liquidated eo instante as the grant of the partnership interest to servant, the servant would get nothing. This is the source of the famous “carried interest” beloved of hedgefundies.

Judge Christian N. (“Speedy”) Weiler recognizes ES NPA Holding, LLC, Joseph NPA investment, LLC, Tax Matters Partner, T.C. Memo. 2023-55, filed 5/3/23, as the good and faithful servant when it gets an interest in some consumer lending operations.

It’s a rather complicated buy of Joshus, a/k/a Joshua, s/a/k/a Josh Landy’s (no apparent relation of STJ Adam B. (“Sport”) Landy) operations, whereby ES gets 30% of the restructured bundle. Judge Speedy Weiler needs a couple diagrams (hi, Judge Holmes) to tell the tale, so see T. C. Memo. 2023-55, at pp. 4-7.

If the Islanders had run these plays, they might still be in the playoffs.

Howbeit, the whole question is what was the worth of the bundle as restructured with ES onboard, having contributed neither cash nor property.

IRS claims ES provided no services, and if it did, it got a profits interest because its share was worth a lot more than ES claimed, hence cash out at liquidation.

ES claims Section 7491 BoP shift, but Judge Speedy Weiler speedily shifts to preponderance of evidence, and ES wins anyway.

ES did provide services.

“Considering the text of Revenue Procedure 93-27 § 4, the evidence supports a finding that ES NPA directly (or through its principals), before and after formation, provided services to or for the benefit of the partnership in a partner capacity or in anticipation of being a partner. It is undisputed that the material assets of this partnership are held in NPA, LLC, and the activities ES NPA performed were to and for the benefit of the future partnership. It is of no material consequence that ES NPA’s interest in NPA, LLC is held indirectly through IDS, which is a mere conduit since the liquidation rights in the class C units in both IDS and NPA, LLC are identical. This partnership came about only through ES NPA and NPA, Inc.’s joint ownership of IDS and their ownership interest in NPA, LLC. Other relevant elements here evidencing that the application of Revenue Procedure 93-27 is proper are the presence of entrepreneurial risk and the receipt of a profits interest in the capacity as a partner. Thus, it is entirely reasonable to conclude that ES NPA’s receipt of the class C units meets the intended parameters of Revenue Procedure 93-27 § 4.” T. C. Memo. 2023-55, at p. 12.

OK, but what was the partnership worth at the instant ES got its interest? Our old pal willing buyer and BFF willing seller come in holding hands. It falls to judges to weigh, balance, learn, mark, and inwardly digest the lucubrations of dueling experts.

But Joshus-Joshua-Josh got on the stand, and we should all have such witnesses, whatever their names are.

“Determining credibility is the province of the Court, and we find the testimony of Mr. Landy, a neutral third-party regarding the nature of the transaction at issue, to be credible and unbiased. We find nothing in the record to dispute a finding that the transaction was arm’s-length and bona fide. We decline to adopt respondent’s expert’s opinion of value.” T. C. Memo. 2023-55, at p. 16.

Value zero. ES wins deficiency, and chops go by the board. Moreover, if you’re setting up, or defending, a carried-interest case, this opinion has good stuff.


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