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

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.

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

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?

Learning Objectives

After completing this course, you will be able to:

• Identify certain restrictions on the transfer of capital interests
• Determine how TC Memo 2023-55 impacts the transfer of LLC interests
• Ascertain differences in the taxation of restricted and non-restricted capital interest transfers
• Decide when a recipient is taxed on the transfer of a profits interest

• Field of Study: Taxes
• Level of Knowledge: Intermediate
• Advance Preparation: None
• Teaching Method: Seminar/Lecture
• Delivery Method: Group-Internet (via computer)
• Attendance Monitoring Method: Attendance is monitored electronically via a participant's PIN and through a series of attendance verification prompts displayed throughout the program
• Prerequisite: Three years+ business or public firm experience preparing complex tax forms and schedules, supervising other preparers or accountants. Specific knowledge and understanding of pass-through taxation, including taxation of partnerships, S corporations and their respective partners and shareholders.

Strafford Publications, Inc. is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of Accountancy have final authority on the acceptance of individual courses for CPE Credits. Complaints regarding registered sponsons may be submitted to NASBA through its website: www.nasbaregistry.org.

IRS Approved Provider

Strafford is an IRS-approved continuing education provider offering certified courses for Enrolled Agents (EA) and Tax Return Preparers (RTRP).