I have a client that formed a new partnership. He is giving 10% of the partnership to his manager as an incentive. The partnership shares will be surrendered if the partner leaves the company before five years. Do I show the service contribution to this 10% partner this year or when after the 5 year period?

ANSWER

The BIDaWIZ Team's Answer:

For tax purposes, a partner who receives a partnership interest in exchange for services with the risk of substantial forfeiture generally will not be treated as a partner until that interest has become substantially vested which in this case is after five years. This is referenced in Section 83(b) of the internal revenue code. Please let us know if this answers your question. Please note that a substantial risk of forfeiture exists if the rights in the property transferred depend on performing (or not performing) substantial services, or on a condition related to the transfer, and the possibility of forfeiture is substantial if the condition is not satisfied.