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Tax Treatment of Partnership Profits Interests: Recent U.S. Tax Court Decision, IRS Safe Harbor, Tax Planning

Recording of a 90-minute premium CLE/CPE video webinar with Q&A

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Conducted on Tuesday, July 25, 2023

Recorded event now available

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This CLE/CPE webinar will discuss the effects of granting, vesting, and selling profits interests in partnerships along with the benefits and burdens of awarding these equity rights. The panel will discuss the recent U.S. Tax Court decision in ES NPA Holding L.L.C. v. Commissioner, key tax considerations when structuring profits interests, and transfers for companies employing or considering this method of transferring partnership interests. The panel will also offer tactics for structuring compensation plans with profits interest and other incentives under current tax rules.

Description

There are several issues faced by partnerships and LLCs when handling profits interest and compensation matters. These issues are unique to partnership and LLC compensation structures due to the differences in the tax regime applied to entities taxed as partnerships compared to those taxed as corporations. Tax counsel and advisers must have a thorough knowledge of the potential legal and tax implications of issuing profits interest to avoid any unintended tax consequences.

On May 3, 2023, the U.S. Tax Court issued a memorandum opinion in ES NPA Holding L.L.C. v. Commissioner taking the position that the taxpayer's indirect receipt of a profits interest in a lower-tier partnership qualified as a non-taxable event under the safe harbor provided in Rev. Proc. 93-27. However, this may not apply to all instances and the partnership structure is a pivotal component in the application of the profits interest safe harbor.

Profits interest arrangements have specific economic and tax implications and tax counsel must carefully consider these issues to effectively navigate any planning and compliance challenges that may arise.

Listen as our experienced panel offers a thorough and practical guide to planning considerations in partnership and LLC grants of profits interest as well as tactics for structuring compensation plans with profits interest and other incentives under current tax law.

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Outline

  1. Profits interest as compensation and alternatives for partnerships and LLCs
  2. ES NPA Holding L.L.C. v. Commissioner and Rev. Proc. 93-27
  3. Planning considerations under current tax law
  4. Reporting and compliance challenges
  5. Best practices in structuring equity compensation arrangements to avoid unfavorable tax treatment

Benefits

The panel will review these and other key issues:

  • Profits interest as equity compensation in partnerships and LLCs
  • Available planning methods based on profits interest as compensation
  • Tax treatment of profits interest and recent U.S. Tax Court decision in ES NPA Holding L.L.C. v. Commissioner
  • Best practices and critical considerations for profits interest grants in partnerships and LLCs

Faculty

Klimpl, Timothy
Timothy S. (Tim) Klimpl
Counsel
Shipman & Goodwin

Mr. Klimpl is a seasoned attorney with experience providing ERISA advice and related services to a variety of plan...  |  Read More

Reed, Brianna
Brianna L. Reed
Attorney
Proskauer Rose

Ms. Reed's practice focuses on tax planning for private investment funds, including fund formation, structuring and...  |  Read More

Teigman, David
David B. Teigman
Partner
Proskauer Rose

Mr. Teigman is a partner in the Tax Department and a member of the Employee Benefits & Executive Compensation...  |  Read More

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