In this article, Lee charts two alternative methods for implementing an aggregate solution to the problem of partnership profits share exchanged for services. The functional, or judicial, method, he explains, is to handle (1) the exchange of partner-capacity services for a profit share subject to the risk of the venture with the Culbertson "common law relation of partnership," nonrealization event doctrine, implicitly contemplated by the 1984 legislative history to section 707(a)(2); (2) the classic Diamond transitory partner with a substance-over-form rule or step-transaction rule; and (3) a sale of the partnership interest in circumstances that would result in ordinary income in a sale of a proprietorship by a proprietress with the P.S. Lake "substitute for ordinary income" doctrine, widely applied in analogous cases under the 1939 code. Lee believes that rather than just setting forth standards, regulations should implement structured discretionary justice. Therefore, he recommends that the Service and the Treasury use regulations to legislate a defined "tainted freestanding intangible" approach, inspired in part by United States v. Stafford and in part by Wolfsen Land & Cattle, which would treat the value created by performance of partner-capacity services (or the promise of future partner-capacity services) as a built-in gain freestanding intangible. The transfer of such an intangible to the partnership in return for a profits interest subject to the risks of the venture, says Lee, would gall under section 721's nonrecognition umbrella, as in Stafford. Lee explains that sales by the service partner of her five-year profits share would be tainted as follows. The transferred intangible would carry ordinary income status in the transferee partnership's "hands" for five years under section 724, with mandatory allocations of the built-in tainted gain under section 704(c) to the service partner.

Lee Also suggests two alternative tax accounting solutions to a year 2 sale of a profits share. His Alternative A would be to hold the transaction (receipt of the profits share) open for two years under the "indeterminable character" variant of the open transaction doctrine to see whether there will be (1) no sale within the two-year window and resultant nonrecognition and sale thereafter likely at capital gain (just like a proprietress); or (2) a sale in year 2 resulting in ordinary income because of a transitory partner. His Alternative B would be to apply year 2 balancing entry notions based on a reading of Hillsboro.

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62 Tax Notes 1733-1745 (1994)