When a person contributes property to a partnership in exchange for a partnership interest, the transaction is usually not subject to federal income tax.  In contrast, when a person performs services for a partnership in exchange for a capital interest in the partnership, the transaction is generally taxable.

Prior to 1993, there was conflicting authority as to whether a partner who provides services to a partnership in exchange for a profits interest is taxable upon receipt of the profits interest.  In 1993, the IRS effectively resolved this uncertainty by issuing Revenue Procedure 93-27.

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