David Hasen (Florida) has posted a new piece on SSRN, “Taxing the Transfer of Compensatory Partnership Interests.” Here’s the abstract:

The proper rules for taxing the exchange of partnership interests for services have never been settled. This paper argues that background policy considerations support a regime that treats the receipt of most profits interests as nontaxable and the receipt of capital interests as taxable, treats the historic partners as not recognizing gain or loss on the issuance of the interest, and limits cost recovery for the partnership to its historic basis in the assets deemed transferred to the recipient service partner (generally in the case of a capital interest). Central to the analysis is the claim that different considerations support deferral or taxation on the partnership side of the exchange from those that support deferral or taxation on the partner side. 

Efficiency considerations suggest modifications to current or proposed rules in the area consistent with the regime just described. First, the same treatment should apply to transfers of capital interests in transactions involving already-existing partnerships as to those in transactions that create partnerships. Second, Congress should amend section 83(h) to conform cost recovery in the subchapter S setting to the rule advocated here for cost recovery under subchapter K. Third, and more ambitiously, Congress should extend the same treatment to the C corporation context.