The Proper Tax Treatment of the Transfer of a Compensatory Partnership Interest

When a partnership transfers a compensatory partnership interest, there not only is a question of whether that interest is includable in the recipient's income; there also is a question as to the manner in which the value of the interest is to be determined if it is included. Those two issues are the focus of this article. This article does not address the question of how the profits interest of a manager of a private equity fund should be taxed. Rather, the focus of this article is on the more general question of how the receipt of a compensatory partnership interest should be taxed. However, the analysis and conclusions of this article are relevant to the resolution of the questions concerning the taxation of a manager of a private equity fund. The author concurs with the position taken in those proposed regulations and considers them to be consistent with tax policy.