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Taxation of Equity Based Arrangements for LLCs: Capital and Profits Interest Transfers, Appreciation Rights

Note: CLE credit is not offered on this program

Recording of a 110-minute CPE webinar with Q&A

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Conducted on Tuesday, November 19, 2024

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This webinar will review how transfers of partnership interests to partners are taxed and reported. Our panel of astute federal tax experts will break down the tax treatment of these interests by type of arrangement, review Section 83(b) elections, and discuss recent court decisions pertaining to these transfers.

Description

LLCs and partnerships can transfer capital or profits interests. The tax consequences to the partnership and partner of a capital interest transfer vary depending on whether the transfer has restrictions, whether the recipient makes an IRC Section 83(b) election, and the valuation of the partnership.

Other than Revenue Procedure 93-27, which dictates that receipt of a profits interest had no value and garners no tax consequences, there has been little authoritative guidance pertaining to the taxation of a transfer of a profits interests in an LLC. This changed with the taxpayer-favorable ruling in ES NPA Holding LLC v. Commissioner, T.C. Memo 2023-55. In addition to finding in favor of the LLC, the decision confirmed the long-held belief that an LLC's value should be based upon its market value in an arms-length sale. The Tax Court further explained that services provided by a corporate owner "for the benefit of" a partnership as a whole satisfies the requirement to provide services within a transfer arrangement. This reasoning could be applied to the transfer of carried interests and other equity arrangements, including tiered partnerships.

In addition to the transfer of capital and profits interests, bonuses or appreciation rights could be granted. Unlike equity transfers, these are treated more like deferred compensation arrangements, are taxed at ordinary income rates, and do not result in ownership of the entity. Still, these arrangements are subject to valuation requirements under IRC Section 409A. Partners and members enter and exit partnerships regularly. Tax advisers working with these entities need to thoroughly understand the options available and the tax treatment of these transfers.

Listen as our panel of flow-through authorities examines the types of equity compensation and other arrangements available for LLCs and the tax consequences to the LLC and its members.

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Outline

  1. Equity compensation incentives: an introduction
  2. Capital interests
    1. Restricted
    2. Non-restricted
    3. IRC Section 83(b) election
    4. Valuation
  3. Profits interests
  4. Appreciation and other arrangements
  5. Recent decisions

Benefits

The panel will cover these and other key issues:

  • How will TC Memo 2023-55 impact profits interests grants?
  • What is considered a restriction on the transfer of a capital interest?
  • When is the transfer of a profits interest taxed?
  • Which members and partners are candidates for Section 83(b) elections?
  • How does the partnership record the transfer of capital interest?
  • How are appreciation rights taxed?

Faculty

Hunt, Joseph
Joseph E. Hunt, IV
Member
Morse

Mr. Hunt is a corporate and tax transactional attorney with over 13 years of experience advising startup, emerging...  |  Read More

Salkin, Barry
Barry L. Salkin
Of Counsel
The Wagner Law Group

Mr. Salkin is an employee benefits attorney focusing on diversified employee benefits, compensation, ERISA,...  |  Read More

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