14 1 T.C. No . 15

UNITED STAT ES TAX COURT

CRESC ENT HOL DINGS, LLC, ARTHUR W . FIELDS AND JOLEEN H. FIELDS, A PARTNER OTHER TH AN THE TAX MATTERS PARTNER, Pet it io ne rs v. COMM ISSI ONER OF INTERNAL REVENUE, Resp on de nt

Doc ke t No s. 2 37 56 -1 1, 2 37 57 -1 1. Fil edDecem be r 2, 2 01 3.

Hol di ng s was a li mit edli ab il ity co m pa ny form edon Sep t. 7 , 20 06 , andcla ss ifi edas apartn ers hi p fo r Fed eral in co m e ta x p ur po se s. Res ou rces was ali m it edli ab il ity co m pa ny whos e o wne rs hi p was tra ns ferr edto Hol di ng s o n S ep t. 7 , 20 06 . On Sep t. 7 , 20 06 , Res ou rces en te redin to anem pl oym en t ag reem en t wi th P to have Hol di ng s tran sf

er a 2 % in te res t i n Ho ld in gs to P if P serve d a s ch ie f ex ecu ti ve off

ic er (C EO) of R es ou rces fora pe rio d o f th ree years en di ng on Sep t. 7 , 20 09 . The 2 % in te res t was subjec t t o asubs tant ia l ris k o f fo rfei ture an d was no t tran sf erab le . Hol di ng s al lo cat ed pa rtn ers hi p p ro fit s an d l os se s at tri bu tabl e to th e 2 % in te res t t o P for th e ta xabl e y ears 20 06 an d 2 00 7 (years at i ss ue ). Ps i nc lu de d the se am ou nt s i n the ir g ro ss in co m e fo r th e y ears at i ss ue . P res ig ne d a s CEO an d fo rfei te d h is rig htto th e 2 % in te res t b efo re i t v es te d.- 2 - The is su e is whet he r P o r th e o th er p artne rs sh ou ldreco gn iz e th e und is tri bu te d p artne rs hi p i nc om e al lo cat io ns att rib ut ab le to th e 2% i nt eres t fo r th e y ears at i ss ue . Held : Th e 2 % in te res t i s a p artne rs hi p c ap it al in te res t, n ota pa rtn ers hi p p ro fit s i nt eres t. Rev . Pro c. 93 -2 7, 1 99 3- 2 C .B. 34 3, an d Rev . Pro c. 20 01 -4 3, 2 00 1- 2 C .B.19 1, ar e in ap pl ic ab le be cau se th ey ap pl y on ly to p artne rs hi p p ro fit s i nt eres ts . Held , furth er, I.R.C. s ec. 8 3 app li es to a no nv es te d p artne rs hi p cap it al in te res t tran sf

erre d i n e xc ha ng e fo r th e p erfo rm an ce o f se rv ic es . Held , furth er, und er s ec. 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., the un di st rib ut edpartn ers hi p i nc om e al lo cat io ns att rib ut ab le to th e no nv es te d 2 % partn ers hi p c ap it al in te res t ar e to be reco gn iz edinth e in co m e o f th e tr an sf

ero r. Held , furth er, Ho ld in gs was the tra ns fero r of th e 2 % pa rtn ers hi p c ap it al in te res t. The un di st rib ut edpartn ers hi p a ll oc at io ns at tri bu tabl e to th e 2 % cap it al in te res t ar e al lo cab le to th e p artne rs ho ld in g the rem ai ni ng in te res t i n Ho ld in gs .
Ja m es R. Kell ey

an d Wil li am

T. Ram se y , forpe ti ti on ers . Ja sp er G. Tay lo r III, Ri ch ardL. Hunn , andMi ch el le A. Spi eg el , for in te rv en or . W . Ben jam inMcC le nd on an d Ki rkCh ab ers ki , forres po nd en t.- 3 -

RUWE , Ju dg e: Res po nd en t i ss ue d ano ti ce o f fi na l p artne rs hi p adm in is tra ti ve ad

jus tm en t (F PAA) fo r th e ta xabl e y ear 2 00 6 andanFPAA fo r th e ta xabl e y ear 2 00 7 t o C res cen t Ho ld in gs , LLC (Cres cen t Ho ld in gs ). Arth urFie ld s (p et it io ne r), a p artne r ot he r th anth e ta x m at te rs partn er, fi le d p et it io ns for read jus tm en t o f pa rtn ers hi p i te m s u nd er s ect io n 6 22 6. The ca se s wer e 1
co ns ol id at edfortri al , bri efi ng , andop in io n. The is su es forde ci si on are: (1) whet he r pe ti ti on er s ho ul d b e tr eat edas a pa rtn er o wni ng a 2% i nt eres t i n C res cen t Ho ld in gs forpu rp os es of a ll oc at in g i ts pr of it s an d l os se s fo r th e ta xabl e y ears 20 06 an d 2 00 7 (years at i ss ue ); a nd(2) if
no t, h ow the pro fit s an d l os se s at tri bu tabl e to th e 2 % in te res t s ho ul d b e al lo cat ed to th e o th er p artne rs . FINDINGS OF FACT So m e o f th e fac ts ha ve be enst ip ul at edan d are s o fo un d. Th e st ip ul at io n o f fact s an d the att ach edex hi bi ts are i nc or po rat edhe rei n b y

th is refe ren ce. At the ti m e th e p et it io ns were fi le d, Cr es cen t Ho ld in gs ’ pr in ci pa l p la ce o f bu si ne ss was i n No rth Caro li na .

All sec ti on refe ren ces are t o the Int ern al Rev enue Co de (Co de ) in effe ctfor 1 th e y ears at i ss ue , andall Ru le refe ren ces are t o the Tax C ou rt Rul es of P ract ic e an d P ro cedur e, un le ss othe rwis e d ire ct ed
.- 4 -

Cres cen t Re so ur ces , LLC (Cres cen t Re so ur ces ), was aGeor gi a li m it ed li ab il ity co m pa ny. Cres cen t Re so ur ces de ve lo pe d andm an ag edco m m erci al , res id en ti al , andm

ul ti fam il y real est at e p ro

jects pri m ari ly in the So ut he as te rnan d So ut hwe st ernUni te d S ta te s. Be fo re Se pt em be r 7, 2 00 6, Cr es cen t Re so ur ces was who ll y own edby D uk e Ven tu res , LLC (Duk e Ven tu res ), a Nev ad a li m it edli ab il ity co m pa ny. Duk e Ven tu res was an i nd ire ctwho ll y own edsubs id iary

of Du ke Ene rg y Co rp . (Duk e Ene rg y ), a p ub li cl y tra de d c om

pa ny. Pet it io ne r joi ne d C res cen t Re so ur ces in19 87 as t he vi ce p res id en t o f rea l
es ta te de ve lo pm en t. Pet it io ne r si gn edanem pl oym en t ag reem en t wi th Cres cen t Res ources on Decem

be r 3, 1 98 7, wh ic h was subs eque nt ly am en de d i n 1 99 4 and 19 98 . At so m e p oi ntinth e 1 99 0s pe ti ti on er b ecame pres id en t o f Cre sc en t Res ources an d am em

be r of th e Duk e Ene rg y

ex ecu ti ve tea m . As a res ul t o f hi s po si ti onon th e ex ecu ti ve tea m , pet it io ne r was all owe d t o p art ic ip at e in Duk e Ene rg y ’s no nqua li fie d e xe cu ti ve ret ire m en t p lan. In20 05 Duk e Ene rg y

hi redMo rg anSta nl ey

as aco ns ul tantto ex pl or e op ti on s t o m on et iz e th e v al ue of C res cen t Re so ur ces . One o f th e p ro po se d o pt io ns was for Duk e Ene rg y

to sel l al l o r a p artof i ts in te res t i n C res cen t Re so ur ces . Mo rg anStanl ey

in fo rm edDuk e Ene rg y

th atit s h ed ge fun ds wou ldbe in te res te d i n- 5 -

pu rch as in g aparti al in te res t i n C res cen t Re so ur ces . Duk e Ene rg y ag reedto sel l a pa rti al in te res t i n C res cen t Re so ur ces . Sal e o f Cre sc en t Re so ur ces On Se pt em

be r 7, 2 00 6, Du ke Ventur es an d C res cen t Re so ur ces en te redin to a fo rm at io n andsal e ag reem en t (F orm at io n Ag reem en t) wi th Mo rg anSta nl ey Real Est at e Fu ndV U.S., L .P., Mo rg anSta nl ey Real Est at e FundV Spe ci al U.S., L.P., Mo rg anStanl ey

Real Est at e In ve st or s V U.S., L.P., MSP Rea l Es ta te FundV, L.P.,
an d M or gan S tanl ey

Str at eg ic Inv es tm en ts , Inc . (In it ia l M S Members ). Pur su an t to th e Fo rm at io n Ag reem en t, Cr es cen t Ho ld in gs , a Dela ware l im it edli ab il ity co m pa ny, w as form edon Sep te m be r 7, 2 00 6. Cr es cen t Ho ld in gs is cla ss ifi edas a pa rtn ers hi p fo r Fed eral in co m e ta x p ur po se s. 2 Purs uantto sec ti on 2.2 (a) o f th e Fo rm at io n Ag reem en t Du ke Ventur es co nt rib ut ed10 0% o f it s i nt eres t i n C res cen t Re so ur ces to Cres cen t Ho ld in gs in
ex ch an ge for10 0% o f th e m em be r in te res t i n C res cen t Ho ld in gs . In ac co rd an ce with s ect io n 2 .2(b ) Cre sc en t Ho ld in gs is su edad di ti on al m em be r in te res ts to pe ti ti on er s uc h tha t the Cres cen t Ho ld in gs m em be r in te res ts were h el d 9 8% b y Duk e Ven tu res an d 2 % by pet it io ne r. Sect io n 2 .2(c ) requi redth at , si m ul tane ou sl y Si nc e Cre sc en t Ho ld in gs is tre at edas apartn ers hi p fo r ta x p ur po se s, i n o ur 2 di sc us si on th e te rm

“pa rtn er” r efer s t o p et it io ne r’s st atus as am em be r of Cres cen t Hol di ng s, an d the term

“pa rtn ers hi p” refer s t o C res cen t Ho ld in gs .- 6 -

with the tra ns act io ns insec ti on 2.2 (a) an d (b ), Cres cen t Re so ur ces wou lden te r in to a cred itag reem en t an d b orro w $1 ,22 5,0 00 ,00 0, o f whi ch$1 ,18 7,0 00 ,00 0
wou ldbe di st rib ut edto Cres cen t Ho ld in gs , whi chwou lddi st rib ut e th atam ou ntto Duk e Ven tu res . In ac co rd an ce wi th sec ti on 2.2 (d ), Duk e Ven tu res so ld49 % of t he
m em be r in te res t i n C res cen t Ho ld in gs to th e In it ia l M S Members . Purs ua ntto th e Fo rm at io n Ag reem en t the Ini ti al MS M em be rs pu rch as edfro m

Duk e Ven tures a 49 % m em

be r in te res t i n C res cen t Ho ld in gs forap pr ox im at el y $4 15 m il li on . Co nc urren t wi th th e Fo rm at io n Ag reem en t, o n S ep te m be r 7, 2 00 6, pe ti ti on er en te redin to a ne w em pl oym en t ag reem en t wi th Cres cen t Re so ur ces . Pet it io ne r ag reedto rem ai n the pre si de ntan d c hi ef ex ecu ti ve off ic er o f Cre sc en t Res ources forth ree years. Onth atda te pe ti ti on er al so en te redin to anag reem en t
an d a ckno wled gm en t (F ie ld s Ag reem en t) wi th Cres cen t Re so ur ces an d Du ke Ene rg y . As anin du cem en t fo r pe ti ti on er t o fo rg o h is rig ht s fr om hi s p rev io us em pl oym en t ag reem en t, the Fie ld s Ag reem en t p ro vi de d tha t: (1) Duk e Ene rg y wou ldcred itpe ti ti on er wi th $3 7,7 96 ,00 0 t o an unf un de d b oo kk eep in g a cco un t t o be admin is te redas i f m ai nt ai ne d u nd er Duke Ener gy’ s n on qu al ifi edex ecu ti ve ret ire m en t p lan; an d (2 ) Cre sc en t Ho ld in gs wou ldgra ntpe ti ti on er a 2 % res tri ct ed
m em be rs hi p i nt eres t i n C res cen t Ho ld in gs subjec t t o s ect io n 8 3 o f th e Co de an d i n- 7 -

acco rd an ce wi th th e te rm s s ta te d i n Ex hi bi t A t o the Fie ld s Ag reem en t. Exh ib itA 3 st at edth atpe ti ti on er’s m em be rs hi p i nt eres ts inCres cen t Ho ld in gs wou ldbe fo rfei te d i f he term in at edhi s emplo ym en t wi th Cres cen t Re so ur ces be fo re the th ird
an ni ve rs ary of

th e fo rm at io n o f Cre sc en t Ho ld in gs . Exh ib itA als o s ta te d tha t 4 pe ti ti on er’s “ [i]nt eres ts are n on tra ns ferabl e unl es s an d u nt il for fei ture re stric ti on s sh al l h av e laps ed ”. Exh ib itA requi redpe ti ti on er t o p ay Cres cen t Re so ur ces an am ountsu ffi ci en t t o s at is fy all withh ol di ng for

em pl oym en t t ax es an d o th er ap pl ic ab le tax es be fo re the for fei tu re res tri ct io ns wou ldlap se . Exh ib itA pro vi de d th atpe ti ti on er i s en ti tl edto th e sa m e d is tri bu ti on s as othe r ho ld ers of m em be r in te res ts an d tha t an y

di st rib ut io ns he rece iv edare n otsubjec t t o fo rfei tu re. Pet it io ne r di d n otm ak e anele ct io n u nd er s ect io n 8 3( b) to tre athi s re st ric te d in te res t i n C res cen t Ho ld in gs as s ub st an ti al ly ves te d. On Se pt em

be r 7, 2 00 6, Du ke Ventur es , th e In it ia l M S Members , and pe ti ti on er ex ecu te d an a m en de d andres ta te d l im it edli ab il ity co m pa ny agre em en t of Cres cen t Ho ld in gs , LLC (Hol di ng s Ag reem en t). No pri or ity cap it al The Fie ld s Ag reem en t s ta te s i n re gardto th e 2 % in te res t: “ Hol di ng s i s 3 gr an ti ng Em

pl oyee a 2% r es tri ct edequi ty int eres t i n Ho ld in gs subjec t t o S ect io n 83 of t he Uni te d S ta te s In te rn al Rev enue Co de of 1 98 6, am en de d (the ‘ Co de ’), subs tant ia ll y

inacco rd an ce wi thth e p ro vi si on s o f Exh ib itA her et o (t he ‘ Equ ity Gran t’)”. The th irdan ni ve rs ary was Sep te m be r 7, 2 00 9. 4- 8 -

co nt rib ut io ns were m ad e b y th e m em be rs on or b efo re Se pt em be r 7, 2 00 6. Th e Hol di ng s Ag reem en t was am en de d b y th e fi rs t am en dm en t t o am en de d and
res ta te d l im it edli ab il ity

co m pany agre em en t, d at edeffe ct iv e as of S ep te m be r 29 , 20 06 , andth e se co ndam en dm en t t o a m en de d andres ta te d l im it edli ab il ity co m pa ny agre em en t, d at edeffe ct iv e as of Oc to be r 11 , 20 06 . The am en dm en ts adm it te d M SREF V U.S. CIP- II Co -In ve st m en t Pa rtn ers hi p- F, L.P., MSREF V U.S. CIP-I I Co -In ve st m en t Pa rtn ers hi p- C, L.P., andMSREF V U.S. CIP-II C oIn ve st m en t Pa rtn ers hi p- B, L.P. as ad di ti on al m em be rs to Cres cen t Ho ld in gs . The 5 ad di ti on al m em

be rs rece iv edth ei r in te res ts ou t o f th e 4 9% i nt eres t tha t the Ini ti al MS M em be rs own ed
. Tax Fil in gs of C res cen t Ho ld in gs On Ap ril 17 , 20 07 , Cres cen t Ho ld in gs fil edFo rm 10 65 , U.S. Retu rnof Part ne rs hi p In co m e, fo r th e ta xabl e y ear e nd edDecem be r 31 , 20 06 . Cres cen t Hol di ng s d es ig na te d Du ke Ventur es as t he tax m at te rs partn er o n F orm 10 65
. 6 Cres cen t Ho ld in gs is su eda Sch edul e K-1 , Partne r’s Sh are o f In co m e, Deduc ti on s, Cred it s, et c., to pe ti ti on er tha t al lo cat edhi m $4 23 ,61 1 o f or di na ry

bu si ne ss W e wil l re fer t o the m em be r gr oup tha t co ns is ts of t he se ad di ti on al 5 m em be rs an d the Ini ti al MS M em be rs as M SREF. Duk e Ven tu res was a ls o d es ig na te d a s the tax m at te rs partn er o n C res cen t 6 Hol di ng s’ Form

10 65 forth e ta xabl e y ear e nd edDecem be r 31 , 20 07
.- 9 -

in co m e. Pet it io ne r di d n otrece iv e an y di st rib ut io ns fro m

Cres cen t Ho ld in gs in 20 06 . The i nc om e al lo cat edto pe ti ti on er was cal cu la te d t o re pr es en t h is di st rib ut iv e sh are o f Cre sc en t Ho ld in gs ’ in co m e in acco rd an ce wi th sec ti on 70 4. Pet it io ne r was surp ris edhe rece iv eda Sch edul e K-1 th atall oc at edin co m e to hi m be cau se he be li ev edhe was n ota partn er s in ce h is in te res t h adno t yet ve st ed . Peti ti on er s po ke with Wayne McGee , who was the n the ch ie f fi na nc ia l of fic er o f Cre sc en t Re so ur ces . W ayne McGee to ldpe ti ti on er tha t h e was no t a pa rtn er b utno te d tha t Cr es cen t Ho ld in gs ha d a lre ady fil edSch edul es K-1 and Mo rg anStanl ey

di d n otwantto ha ve to fil e am en de d S ch edul es K-1 fo r al l o f th e pa rtn er i nv es to rs inMSREF . Peti ti on er was to ldth atth e m at te r wou ldbe
co rrec te d fo r th e n ex t t ax y ear. As a res ul t, p et it io ne r rep orte d the Sch edul e K-1 it em s o n h is 20 06 Fed eral in co m e ta x re tu rn , bel ie vi ng th atth e m atte r wou ldbe ta ke n c are o f fo r th e n ex t year. On Ap ril 15 , 20 08 , Cres cen t Ho ld in gs fil edFo rm 10 65 forth e 2 00 7 t ax y ear. Cr es cen t Ho ld in gs is su eda Sch edul e K-1 to pe ti ti on er tha t al lo cat ed $3 ,60 8,2 18 of o rd in ary bu si ne ss in co m e to hi m . Peti ti on er d idno t re cei ve any di st rib ut io ns fro m

Cres cen t Ho ld in gs in20 07 . Peti ti on er was sh oc ke d t o re cei ve an ot he r Sch edul e K-1 be cau se he be li ev edth atW ayne McGee ha d i nd ic at edhe
wou ldno t re cei ve a Sch edul e K-1 for20 07 . Peti ti on er s po ke with Kev inLam be rt,- 10 -

who was the n the ch ie f fi na nc ia l o ffi cer o f Cre sc en t Re so ur ces . Kevi n Lam be rt th ensp ok e wit h the acco un ti ng firm th atha d p rep aredth e Fo rm 10 65 an d Sch edul es K-1 fo r Cre sc en t Ho ld in gs . Kevi n Lam be rt t ol d p et it io ne r th atth e acco un ti ng firm

be li ev edth e eco no m ic subs tanc e o f th e tr an sa ct io n i nd ic at edth at pe ti ti on er was a pa rtn er. Pet it io ne r was up se t b utwant edto av oi d t ax pe na lt ie s fo r no t p ro pe rly repo rti ng hi s i nc om e, so he rep orte d the Sch edul e K-1 it em s o n h is 20 07 Fed eral in co m e ta x re turn . The in co m e al lo cat edto pe ti ti on er fo r th e ta xabl e y ears 20 06 an d 2 00 7 was cal cu la te d t o re pr es en t h is di strib ut iv e sh ares un de r se ct io n 7 02 . As a res ul t, pe ti ti on er h adto pay

th e ta x a ss oc ia te d wi th th e in co m e al lo cat io ns ou t o f hi s o wn po ck et . Peti ti on er was un happ y with the se subs tant ia l o ut -o f-p oc ke t ex pe ns es an d sp ok e with the m an ag em en t o f Duk e Ven tu res an d the bo ardof C res cen t Ho ld in gs . An ag reem en t was reac he d wh ereb y Cres cen t Re so ur ces pa id$1 ,90 0,0 40 to pe ti ti on er o n J ul y

16 , 20 08 , to co ve r th e ta x h e p ai d o n the in co m e al lo cat io ns for th e 2 00 6 and20 07 tax ab le y ears . On Ja nu ary 13 , 20 09 , Cres cen t Re so ur ces pa id $5 24 ,50 0 t o p et it io ne r to co ve r hi s es ti m at edtax forth e 2 00 8 t ax ab le y ear. 7

The se paym en ts to co ve r pe ti ti on er’s t ax were n ottre at edby Cresc en t 7 Hol di ng s as a partn ers hi p d is tri bu ti onto pe ti ti on er.- 11 -

Ban kr up tc y The fin an ci al co nd it io n o f Cre sc en t Re so ur ces be gan t o d et eri or at e in 20 09
an d b an krup tc y

was i m m in en t. Pet it io ne r res ig ne d fr om Cres cen t Re so ur ces pu rs ua ntto a le tt er d at edMay 29, 2 00 9, wh ic h was de li ve redon or b efo re Jun e 1 , 20 09 , to Kevi n Lam

be rt. Si nc e p et it io ne r res ig ne d b efo re h is th ree- y ear an ni ve rs ary on Sep te m

be r 7, 2 00 9, h is in te res t i n C res cen t Ho ld in gs was fo rfei te d. In alet te r ad dr es se d t o the ho ld ers of m em be r in te res ts inCres cen t 8 Hol di ng s d at edJu ne 9, 2 00 9, p et it io ne r ab an do ne d wh at ev er i nt eres t h e h adin Cres cen t Ho ld in gs . On Ju ne 10 , 20 09 , Cres cen t Ho ld in gs an d C res cen t Re so ur ces fil eda pe ti ti on un de r ch ap te r 11 of t he Ban krup tc y Co de with the U.S. Ban krup tc y Co urt fo r th e Weste rnDis tri ctof Tex as (ba nkrupt cy co urt). By let te r da te d M arch 9, 2 01 0, Cr es cen t Ho ld in gs , th ro ug h the ir c ou ns el in th e ch ap te r 11 pro ceed in g, d em an de d tha t p et it io ne r rep ay th e $ 2,4 24 ,54 0 p ai d t o hi m to co ve r hi s 2 00 6, 2 00 7, an d 2 00 8 i nc om e ta x l iabi li ti es res ul ti ng fro m th e al lo cat io n o f hi s d is tri bu ti ve sh ares of i nc om e. The l ette r st at ed : “ As a re su ltof y ou r de pa rtu re, y oufor fei te d the po te nt ia l i nt eres t upo n wh ic h the Tax Adva nc e pa ym en ts were b as ed , alo ng with any rig htto ret ai n s uc h p aym en ts or h av e th em App en di x E o f th e Hol di ng s Ag reem en t p ro vi de s tha t i f pe ti ti on er 8 te rm in at edhi s emplo ym en t p rio r to Sep te m be r 7, 2 00 9, the 2% i nt eres t wo ul d b e fo rfei te d t o C res cen t Ho ld in gs .- 12 -

ap pl ie d t o your ta x l iabi li ty.” O n J un e 9 , 20 10 , Cres cen t Ho ld in gs an d C res cen t Res ources fil edanadve rs ary co m pl ai ntinth e b an krup tc y

co urt ag ai ns t p et it io ne r to reco ve r th e $ 2,4 24 ,54 0 o f ta x a dv an ce p aym en ts . The ad ve rs ary co m pl ai nt st at ed : “ Befo re the in te res t v es te d, h owe ve r, Fie ld s ch os e to term in at e h is
em pl oym en t, fo rfei ti ng an y

in te res t i n C res cen t Ho ld in gs , andne ga ti ng hi s i nc om e ta x l iabi li ty aris in g o utof t he for fei te d i nt eres t.” Th e cre di to rs of C res cen t Hol di ng s i nt erv en edinth e b an krup tc y pro ceed in g andcla im edth atan y rep aym en t of th e $ 2.4 m il li on was o wedto th em . Peti ti on er en te redin to anag reem en t wi th th e cre di to rs wher eb y

he ag reedto : (1 ) imm ed ia te ly pay th e cre di to rs $6 00 ,00 0; (2 ) fi le am en de d F ed eral in co m e ta x re tu rn s; an d (3 ) rep ay th e cre di to rs th e ba lanc e o f th e ta x a dv an ce p aym en ts when he rece iv edrefu nd s fr om hi s amend ed returns . Pro cedur al His to ry Res po nd en t i ss ue d an F PAA to Duk e Ven tu res , th e ta x m at te rs partn er fo r Cres cen t Ho ld in gs , forth e 2 00 6 t ax ab le y ear ( 20 06 FPAA) an d an F PAA forth e 20 07 tax ab le y ear ( 20 07 FPAA). The 2 00 6 F PAA in crea se d C res cen t Ho ld in gs ’
or di na ry in co m e b y

$1 1,1 77 ,72 7. Th e 2 00 7 F PAA de crea se d C res cen t Ho ld in gs ’- 13 -

or di na ry in co m e b y

$5 ,99 9,9 68
. The 2 00 6 and20 07 FPAAs d et erm in edth at

9 pe ti ti on er s ho ul d b e tr eat edas apartn er o f Cre sc en t Ho ld in gs forpu rp os es of al lo cat in g p artne rs hi p i te m s. Th e 2 00 6 and20 07 FPAAs wer e al so is su edto pe ti ti on er. Pet it io ne rs ti m el y

fil edpe ti ti on s d is pu ti ng th e d et erm in at io ns inth e 2 00 6
an d 2 00 7 F PAAs. Du ke Ventur es (in te rv en or ) as th e ta x m at te rs partn er fi le d a
no ti ce o f el ect io n t o i nt erv en e. OPINION Ju ris di ct io n Cres cen t Ho ld in gs is a li m it edli ab il ity co m pa ny with two or m or e m em be rs ; th eref or e, itis tre at edas apartn ers hi p u nl es s i t el ect s t o b e tr eat edas a co rp or at io n. Se e se c. 30 1.7 70 1- 3( b) (1 )(i ), Pro ced . & Adm in . Reg s. Cre sc en t Hol di ng s d idno t el ectto be tre at edas aco rp or at io n andth us is tre at edas a pa rtn ers hi p fo r Fed eral in co m e ta x p ur po se s. The subs tant iv e law with re sp ectto th e in co m e ta xa ti on of p artne rs an d pa rtn ers hi ps is fou ndinsubc hapt er K, ch ap te r 1, s ub ti tl e A of th e Co de (s ub ch ap te r K). The u ni fie d aud itan d l it ig at io n p ro cedur al rul es ap pl ic ab le to
The ne t ef

fectof t he 20 06 an d 2 00 7 F PAAs ad jus tm en ts to Cres cen t 9 Hol di ng s’ ord in ary in co m e was anin crea se of $ 5,1 77 ,75 9.- 14 -

pa rtn ers hi ps an d the ir p artne rs were en act edby Con gr es s i n the Tax Equi ty and Fi sc al Res po ns ib il ity

Act o f 19 82 (TEFRA), Pub. L. No. 9 7- 24 8, s ec. 4 02 (a), 9 6 St at . at 6 48 , andam en de d b y Co ng res s i n the Taxp ay er Re li ef Actof 1 99 7 (TRA 19 97 ), Pub. L. No. 1 05 -3 4, s ec. 1 23 8, 1 11 Sta t. at10 26 . The d et erm in at io ns of pa rtn ers hi p i te m s i n p artne rs hi p- le ve l p ro ceed in gs are b in di ng on th e p artne rs an d
m ay no t b e ch al le ng edinsubs eque ntpartn er-l ev el pro ceed in gs . See s ecs . 62 30 (c)( 4) , 74 22 (h ). Sect io n 6 22 6 p ro vi de s fo r th e jud ic ia l re vi ew of FPAAs. Gen eral ly, un de r se ct io n 6 22 6( f) we h av e juri sd ic ti onto de te rm in e al l p artne rs hi p i te m s o f th e pa rtn ers hi p fo r th e p artne rs hi p t ax ab le y ear t o wh ic h the FPAA rel at es an d the pr op er al lo cat io n o f th os e p artne rs hi p i te m s among th e p artne rs . Our jur is di ct io n is no t l im it edto th e p artne rs hi p i te m s ad jus te d i n the FPAA. See Tig ers Ey e Trad in g, LLC v . Comm is si on er, 1 38 T.C. 67 , 95 (20 12 ); s ec. 3 01 .62 26 (f)-1 (a), Pro ced . & Adm in . Reg s. Sec ti on 62 31 (a)( 3) de fin es partn ers hi p i te m s as “ an y it em requi redto be tak enin to acco un t fo r th e p artne rs hi p’s t ax ab le y ear u nd er an y pr ov is io n o f subt it le A to th e ex te ntreg ul at io ns pre sc rib edby the Secr et ary pr ov id e th at , forpu rp os es of t hi s s ub ti tl e, su chit em is m or e ap pr op ria te ly de te rm in edat t he partn ers hi p l ev el th anat the partn er l ev el .” Whe th er a t axpa y er is a partn er i s a p artne rs hi p i te m if the tax pa y er’s cl ai m

th athe was n ota pa rtn er- 15 -

wou ldaffe ctth e d is tri bu ti ve sh ares of t he othe r pa rtn ers . See Bl on ie n v . Co m m is si on er, 1 18 T.C. 54 1, 5 51 -5 52 (20 02 ). Sect io n 3 01 .62 31 (a)( 3) -1 (a)( 1) (i) , Pro ced . & Adm in . Reg s., p ro vi de s tha t a p artne r’s sh are o f in co m e an d l os s i s m or e ap pr op ria te ly det erm in edat t he partn ers hi p l ev el
. The 20 06 an d 2 00 7 F PAAs d et erm in edth atpe ti ti on er was a pa rtn er o f Cres cen t Ho ld in gs forpu rp os es of a ll oc at in g p ro fit s an d l os se s. Pet it io ne r cl ai m s th athe was n ota pa rtn er. The all oc at io n o f pr of it s an d l os se s o f Cre sc en t Hol di ng s t o p et it io ne r, Duk e Ven tu res , andMSREF is a pa rtn ers hi p i te m . See s ec. 62 31 (a)( 3) ; s ec. 3 01 .62 31 (a)( 3) -1 (a)( 1) (i) , Pro ced . & Adm in . Reg s. Acco rd in gl y , we ha ve juri sd ic ti on to de te rm in e whe th er p et it io ne r was a pa rtn er o f Cre sc en t Hol di ng s an d the all oc at io n o f th e p ro fit s an d l os se s as so ci at edwith the 2% in te res t i n C res cen t Ho ld in gs . Bu rd enof P ro of The Co m m is si on er’s d et erm in at io ns inanFPAA are g en eral ly pres um ed
co rrec t, an d aparty chal le ng in g an F PAA ha s the bu rd enof p ro vi ng th atth e Co m m is si on er’s d et erm in at io ns are i n e rro r. See Ru le 14 2( a); W el chv. Hel ve rin g, 29 0 U.S. 1 11 , 11 5 (1 93 3) ; Re publ ic Pla za Pr op s. P’sh ip v. Co m m is si on er, 1 07 T.C. 94 , 10 4 (1 99 6) . Int erv en orarg ue s tha t the bu rd enof p ro of is on eit he r pe ti ti on er o r res po nd en t. Our co nc lu si on s, h owe ve r, are b as edon a pr ep on de ran ce- 16 -

of th e ev id en ce, an d thu s the all oc at io n o f th e b ur de n o f pr oo f is imm at eri al . See Kim be rli n v . Comm is si on er, 1 28 T.C. 16 3, 1 71 n.4 (20 07 ). Arg um en ts Pet it io ne r’s rig htto th e 2 % in te res t i n C res cen t Ho ld in gs ne ve r ve st ed
. Nev erthe le ss , bet weenth e d at e th e 2 % in te res t was gra nt edto hi m an d the da te pe ti ti on er fo rfei te d the in te res t, Cr es cen t Ho ld in gs all oc at eda si gn ifi can t am ou nt of in co m e to th is in te res t. Pet it io ne rs arg ue th atsec ti on 83 ap pl ie s t o the no nv es te d 2 % in te res t i n Cres cen t Ho ld in gs . Becau se pe ti ti on er’s ri gh t t o the 2% i nt eres t n ev er v es te d, h e was no t the own er o f th e in te res t u nd er s ect io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s. As
a res ul t, p et it io ne rs arg ue th atpe ti ti on er s ho ul d n otbe all oc at edan y partn ers hi p pr of it s o r lo ss es attrib ut ab le to th e in te res t fo r th e y ears at i ss ue . In te rv en orarg ue s tha t s ect io n 8 3 d oe s n otap pl y to th e 2 % in te res t. In te rv en orco nt en ds th atpe ti ti on er’s i nt eres t was a pa rtn ers hi p p ro fit s i nt eres t; th eref or e, un de r Rev . Pro c. 93 -2 7, 1 99 3- 2 C .B. 34 3, p et it io ne r was li ab le fortax on hi s s ha re o f th e und is tri bu te d p ro fit s o f Cre sc en t Ho ld in gs for th e y ears at is su e. 1 0 W e n ot e th atin te rv en ordo es no t ar gu e th atpe ti ti on er was a pa rtn er o f

1 0 Cres cen t Ho ld in gs un de r se c. 76 1( b) an d, the refo re, s ho ul d b e al lo cat ed (co nt in ue d...)- 17 -

Res po nd en t ar gu es th atRev . Pro c. 93 -2 7 andRev . Pro c. 20 01 -4 3, 2 00 1- 2 C.B. 1 91 , app ly onl y

to partn ers hi p p ro fit s i nt eres ts an d are i napp li cab le to a pa rtn ers hi p c ap it al in te res t an d tha t p et it io ne r’s in te res t i n C res cen t Ho ld in gs was a cap it al in te res t. Res po nd en t ar gu es th atpe ti ti on er’s p artne rs hi p c ap it al in te res t 1 1 is subjec t t o s ect io n 8 3 andth atsi nc e p et it io ne r was no t the own er o f th e in te res t un de r se ct io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., n o p ro fitor l os s s ho ul d h av e b een al lo cat edto hi m

forth e y ears at i ss ue . 1 2 Fo r go odm eas ur e in te rv en orals o arg ue s tha t i f Rev . Pro c. 93 -2 7 d oe s n ot ap pl y , th ensec ti on 1.7 21 -1 (b )(1 ), In co m e Tax Reg s., an d n otsec ti on 83 , con tro ls ; th us pe ti ti on er was th e o wne r of th e in te res t.

(...co nt in ue d) 1 0 pa rtn ers hi p p ro fit s o r lo ss es . Res po nd en t d oe s n otarg ue th atRev . Pro c. 93 -2 7, 1 99 3- 2 C .B. 34 3, an d 1 1 Rev . Pro c. 20 01 -4 3, 2 00 1- 2 C .B. 19 1, ar e in va li d. Re sp on de ntsp eci fic al ly lim it s hi s ra ti on al e to arg ui ng th atpe ti ti on er’s i nt eres t was a pa rtn ers hi p c ap it al in te res t, an d thu s s ec. 8 3 app li es . Inhi s an swe rs res po nd en t re qu es te d the Co urt t o app ro ve th e 1 2 de te rm in at io ns m ad e in th e FPAAs . Howev er, i n h is pre tri al m em or an du m an d po st tri al bri ef, res po nd en t ar gu edth atpe ti ti on er i s n otth e o wne r of th e 2 % in te res t inCres cen t Ho ld in gs .- 18 -

Subc hapt er K an d R ev . Pro cs . 93 -2 7 and20 01 -4 3 Sect io n 7 21 (a) p ro vi de s tha t “ [n ]o ga inor l os s s ha ll be reco gn iz edto a pa rtn ers hi p o r to an y

of i ts partn ers inth e cas e o f a co nt rib ut io n o f pr op erty to th e pa rtn ers hi p i n e xc ha ng e fo r anin te res t i n the partn ers hi p.” (Em ph as is ad de d.) Sect io n 7 21 ap pl ie s t o c on tri bu ti on s o f pr op erty ; i t d oe s n otap pl y to co nt rib ut io ns of servi ces . The treat m en t o f a p artne rs hi p i nt eres t re cei ve d i n e xc ha ng e fo r se rv ic es is pro vi de d fo r in sec ti on 1.7 21 -1 (b )(1 ), In co m e Tax Reg s. § 1 .72 1- 1. No nr eco gn it io n o f ga inor l os s o n c on tri bu ti on .--

* * * * * * * (b )(1 ) * * * To th e ex te ntth atany of t he partn ers gi ve s up any pa rt o f hi s ri gh t t o b e rep ai d h is co nt rib ut io ns (as di st in gu is he d fr om a sh are i n p artne rs hi p p ro fit s) infav or of a no th er p artne r as co m pe ns at io n fo r se rv ic es * * * s ect io n 7 21 do es no t ap pl y . The va lu e o f anin te res t i n s uc h p artne rs hi p c ap it al so tra ns ferr edto a pa rtn er as co m

pe ns at io n fo r se rv ic es co ns ti tu te s i nc om e to th e p artne r un de r se ct io n 6 1. Th e am ou ntof s uc h i nc om e is th e fai r m ark etva lu e of th e in te res t i n c ap it al so tra ns ferr ed , eit he r atth e ti m e th e tr an sf er is m ad e fo r pa stservi ces , or a t the ti m e th e se rv ic es ha ve be en ren de redwher e th e tr an sf er i s co nd it io ne d o n the co m pl et io n o f th e tra ns fere e’s fu tu re s erv ic es . The t im e whe n s uc h i nc om e is real iz ed de pe nd s o n a ll th e fac ts an d c irc um st an ces , in cl ud in g any sub st an ti al res tri ct io ns or c on di ti on s o n the co m pe ns at edpartn er’s ri gh t t o withd raw o r ot he rwis e d is po se of s uc h i nt eres t. * * * Sect io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., p ro vi de s tha t i f a p artne r co nt rib ut es servi ces inex ch an ge fora cap it al in te res t i n the partn ers hi p the n the- 19 -

no nr eco gn it io n treat m en t o f se ct io n 7 21 is no t ap pl ic ab le . As a res ul t, the partn er m us t re co gn iz e th e fai r m ark etva lu e o f hi s p artne rs hi p i nt eres t i n i nc om e. “ The ti m e whe n s uc h i nc om e is real iz edde pe nd s o n a ll th e fac ts an d c irc um st an ces , in cl ud in g any sub st an ti al res tri ct io ns or c on di ti on s o n the co m pe ns at edpartn er’s rig htto withd raw o r ot he rwis e d is po se of s uc h i nt eres t.” Se c. 1.7 21 -1 (b )(1 ), In co m e Tax Reg s. Th e reg ul at io n o pe rat es as ade ferr al pro vi si on inth atth e reco gn it io n o f in co m e m ay be de ferr edif the re ar e subs tant ia l re st ric ti on s o n a pa rtn er’s ri gh t t o d is po se of t he in te res t. Ho wev er, the reg ul at io n d iff ers fro m se ct io n 8 3 i n tha t s ect io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., ex pl ic it ly stat es th atth e tra ns fero r of

th e p ro pe rty is re ga rd edas t he own er o f th e p ro pe rty un ti l the pr op erty be co m es subs tant ia ll y

ve st ed . Sect io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., is si le ntas t o wh o i s the own er o f th e p ro pe rty if th ere a re s ub st an ti al res tri ct io ns on a pa rtn er’s ri gh t t o d is po se of t he in te res t. Sect io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., p ro vi de s tha t the rece ip t o f a pa rtn ers hi p c ap it al in te res t i n e xc ha ng e fo r se rv ic es is tax ab le to th e se rv ic e pr ov id er. Howe ve r, co urts ha d b eendi vi de d o ve r whe th er the rece ip t o f a pa rtn ers hi p p ro fit s i nt eres t i n e xc ha ng e fo r se rv ic es is tax ab le . See Re v. Pr oc . 93
- 27 , sec . 3, 1 99 3- 2 C .B. at 3 43
.- 20 -

InJu ly 199 3 the Co m

mis si on er i ss ue d R ev . Pro c. 93 -2 7 wh ic h s ta te d tha t i f a p ers on rece iv es a partn ers hi p p ro fit s i nt eres t i n e xc ha ng e fo r se rv ic es pro vi de d t o a p artne rs hi p the Co m

mis si on er wo ul d n ottre atth e rec ei ptof s uc h an i nt eres t as a ta xabl e ev en t. Id . sec . 4.0 1, 1 99 3- 2 C .B. at 3 44 . Rev . Pro c. 93 -2 7 d efi ne s a pr of it s i nt eres t as “ a p artne rs hi p i nt eres t o th er tha n acap it al in te res t.” Id . sec . 2.0 2, 1 99 3- 2 C .B. at 3 43 . A capi ta l i nt eres t i s d efi ne d a s “ anin te res t tha t wo ul d gi ve th e h ol de r a s ha re o f th e p ro ceed s i f th e p artne rs hi p’s as se ts were s ol d at fa ir
m ark etva lu e an d the n the pro ceed s wer e d is tri bu te d i n aco m pl et e li qu id at io n o f th e p artne rs hi p.” Id. s ec. 2 .01
. 1 3 On Au gu st20 , 20 01 , th e Co m m is si on er i ss ue d R ev . Pro c. 20 01 -4 3. Re v. Pro c. 20 01 -4 3 fi rs t cl ari fie d R ev . Pro c. 93 -2 7 b y pro vi di ng th atth e d et erm in at io n as to whet he r a p artne rs hi p i nt eres t i s a c ap it al in te res t o r a p ro fit s i nt eres t i s m ad e

“ atth e ti m e th e in te res t i s g ran te d, ev enif, atth atti m e, th e in te res t i s s ub st an ti al ly
no nv es te d (wi th inth e m ean in g o f § 1 .83 -3 (b ) of th e In co m e Tax Reg ul at io ns ).” The tes t u se d i n R ev . Pro c. 93 -2 7 t o d et erm in e whe th er an in te res t i s a 1 3 cap it al in te res t i s s im il ar t o the tes t tha t h adbe enus edby thi s C ourt. Se e MarkIV Pi ctur es , Inc . v. Co m

m is si on er, T.C. Mem o. 1 99 0- 57 1, 1 99 0 Tax Ct. M em o LEXIS 64 3, at*2 0 (“ Deci di ng whet he r a p artne r’s in te res t i n apartn ers hi p i s a cap it al in te res t, rath er tha n am ere p ro fit s i nt eres t, turns onwhet he r th atpartn er ha s the ‘ rig htto rece iv e’ a sh are o f th e p artne rs hi p’s as se ts up on a hypo th et ic al win di ng up an d l iqui da ti on imm ed ia te ly foll owi ng acqui si ti on of t he in te res t, rathe r th anth e m ere r ig htto sh are i n fu tu re p artne rs hi p e arn in gs or p ro fit s.”) , aff’d, 9 69 F.2d66 9 (8 th Cir . 19 92 ).- 21 -

Rev . Pro c. 20 01 -4 3, s ec. 3 , 20 01 -2 C.B. at19 1. As pe rti ne ntto pe ti ti on er an d in te rv en or , Rev . Pro c. 20 01 -4 3, s ec. 4 , 20 01 -2 C.B. at19 2, s ta te s:

Thi s re ve nu e p ro cedur e cl ari fie s tha t, fo r pu rp os es of R ev . Pro c. 93 -2 7, wh ere apartn ers hi p g ran ts anin te res t i n the partn ers hi p th atis subs tant ia ll y

no nv es te d t o aservi ce p ro vi de r, th e se rv ic e pr ov id er wi ll be tre at edas r ecei vi ng th e in te res t o n the da te of i ts gr an t, p ro vi de d tha t: .01 The p artne rs hi p andth e se rv ic e p ro vi de r tr eatth e se rv ic e pr ov id er as th e o wne r of

th e p artne rs hi p i nt eres t fr om th e d at e o f it s gr an t an d the servi ce p ro vi de r ta ke s i nt o a cco un t the di st rib ut iv e sh are of partn ers hi p i nc om e, ga in , lo ss , deduc ti on , andcred itass oc ia te d with tha t i nt eres t i n c om

pu ti ng th e se rv ic e p ro vi de r’s in co m e ta x li ab il ity forth e en ti re p eri oddu rin g wh ic h the servi ce p ro vi de r ha s th e in te res t; .02 Upo n the gra ntof t he in te res t o r atth e ti m e th atth e in te res t be co m es subs tant ia ll y

ve st ed , nei th er the partn ers hi p n oran y of t he pa rtn ers de du ct s an y

am ou nt(as wage s, co m

pe ns at io n, o r ot he rwis e) fo r th e fai r m ark etva lu e o f th e in te res t; an d .03 All othe r co nd it io ns of R ev . Pro c. 93 -2 7 are s at is fie d. One of the co nd it io ns of R ev . Pro c. 93 -2 7 i s tha t the partn ers hi p i nt eres t m us t b e a pr of it s i nt eres t as op po se d t o acap it al in te res t. Rev . Pro c. 93 -2 7, s ec. 4 .01
. Treat is es ha ve no te d tha t Re v. Pr oc . 20 01 -4 3 s eem s t o a ss um e th ata se rv ic e pr ov id er wh o re cei ve s a n on ve st edpartn ers hi p p ro fit s i nt eres t ca n b e rec og ni zed
as a pa rtn er fro m

th e ti m e h e rec ei ve s the in te res t. See 1 Will iam S. McKee et a l.,- 22 -

Fed eral Taxa ti on of P artne rs hi ps an d P artne rs , par . 5.0 3, at5-4 7 (4 th ed . 20 07 ). In te rv en orrel ie s o n thi s as su m pt io n. Cap it al Int eres t o r Pro fit s In te res t In te rv en oran d re sp on de nteach arg ue th atcla ss ifyin g p et it io ne r’s in te res t as ei th er a p artne rs hi p p ro fit s i nt eres t o r a p artne rs hi p c ap it al in te res t d et erm in es whe th er p et it io ne r was th e o wne r of th e in te res t. As ares ul t, the fir stqu es ti on we m us t an swe r is whet he r pe ti ti on er’s i nt eres t i n C res cen t Ho ld in gs was acap it al in te res t o r a p ro fit s i nt eres t fo r pu rp os es of app lying Rev . Pro c. 93 -2 7 andRev . Pro c. 20 01 -4 3. Rev . Pro c. 93 -2 7, s ec. 2 .01 , pro vi de s tha t a “ cap it al in te res t i s an in te res t th atwou ldgi ve th e h ol de r a s ha re o f th e p ro ceed s i f th e p artne rs hi p’s as se ts were so ldat f ai r m ark etva lu e an d the n the pro ceed s wer e d is tri bu te d i n aco m pl et e li qu id at io n o f th e p artne rs hi p.” Rev . Pro c. 93 -2 7, s ec. 2 .02 , def in es a pr of

it s in te res t as “ a p artne rs hi p i nt eres t o th er tha n acap it al in te res t.” Th e d et erm in at io n of whet he r a p artne rs hi p i nt eres t i s a c ap it al in te res t o r a p ro fit s i nt eres t i s m ad e

“ atth e ti m e th e in te res t i s g ran te d, ev enif, atth atti m e, th e in te res t i s s ub st an ti al ly
no nv es te d (wi th inth e m ean in g o f § 1 .83 -3 (b )”. Rev . Pro c. 20 01 -4 3, s ec. 3 , 20 01
- 2 C .B. at 1 91 . Peti ti on er was gra nt edhi s i nt eres t o n S ep te m be r 7, 2 00 6.- 23 -

Res po nd en t ar gu es th atpe ti ti on er rec ei ve d acap it al in te res t i n C res cen t Hol di ng s. In te rv en orarg ue s tha t p et it io ne r rec ei ve d apro fit s i nt eres t. Bo th in te rv en oran d re sp on de ntpo in t t o the Hol di ng s Ag reem en t t o s up po rt t he ir
res pe ct iv e p os it io ns . W e lo okto th e Hol di ng s Ag reem en t t o d et erm in e if pe ti ti on er wo ul d h av e rec ei ve d ash are o f th e p ro ceed s i n ahypo th et ic al li qu id at io n o f Cre sc en t Ho ld in gs on Sep te m be r 7, 2 00 6. Se e Mark

IV Pic tu res , In c. v. Co m

m is si on er, T.C. Mem o. 1 99 0- 57 1, 1 99 0 Tax Ct. M em o LEXIS 6 43 , at *2 0- *2 1 (r ev ie win g the art ic le s o f li m it edpartn ers hi p t o d et erm in e if th e ta xp ay er ha d acap it al in te res t), a ff’d, 9 69 F.2d66 9 (8 th Cir . 19 92 ). Sect io n 9 of Ap pe nd ix E to th e Hol di ng s Ag reem en t s ta te s tha t p et it io ne r’s in te res t i n C res cen t Ho ld in gs sh al l b e subjec t t o a ll th e te rm s an d c on di ti on s o f th e Hol di ng s Ag reem en t. Sec ti on 4 o f App en di x E s tate s “ Arth urW . Fie ld s s ha ll be
en ti tl edto parti ci pa te , fro m ti m e to ti m e, in di st rib ut io ns fro m th e Co m pa ny to i ts Mem be rs inpro po rti onto hi s Pe rcen ta ge Int eres t” . App en di x A d efi ne s pe rcen ta ge in te res t as “ th e p erce nt ag e se t fo rth onExh ib itA”. Exh ib itA st at es th atpe ti ti on er h as anin it ia l p erce nt ag e in te res t o f 2%. Ex hi bi t A o f th e Fi el ds Agr eem en t s ta te s tha t p et it io ne r’s en ti tl em en t t o d is tri bu ti on s i s the “ [s ]am e as all ot he r ho ld ers of t he is su edan d o ut st an di ng m em be rs hi p i nt eres ts ”. Sect io n 4 of- 24 -

App en di x E t o the Hol di ng s Ag reem en t p ro vi de s tha t d is tri bu ti on s p et it io ne r rece iv es are n otsubjec t t o fo rfei tu re. Sect io n 1 2.0 2 o f th e Hol di ng s Ag reem en t p ro vi de s ru le s fo r th e d is so lu ti on of Cres cen t Ho ld in gs . Sect io n 1 2.0 2( c)(i ) pr ov id es th atth e p ro ceed s o f th e sa le of Cres cen t Ho ld in gs an d i ts ass et s s ha ll be di st rib ut edinth e fo ll owi ng ord er o f pr io rit y : (1 ) th e sa ti sf

act io n o f th e d eb ts an d l iabi li ti es of C res cen t Ho ld in gs ; (2 ) th e sa ti sf act io n o f th e ex pe ns es of l iqui da ti on ; an d (3 ) th e se tt in g up o f a res erv e fo r co nt in ge ntli ab il it ie s. Sec ti on 12 .02 (c)( ii ) pr ov id es th atif the re i s a b al an ce rem ai ni ng aft er d is tri bu ti on s t o s at is fy sec ti on 12 .02 (c)( i), the n the ba lanc e sh al l be di st rib ut edto th e m em be rs inacco rd an ce wi thsec ti on6.0 3. Sect io n 6 .03 of t he Hol di ng s Ag reem en t i s en ti tl ed“ Dis tri bu ti on s i n Liqui da ti on .” Sect io n 6 .03 pro vi de s tha t upo n the di ss ol ut io n o f Cre sc en t Hol di ng s “ th e p ro ceed s o f sa le an d o th er as se ts of t he Co m pa ny dis tri bu tabl e to th e Me m be rs un de r se ct io n 1 2.0 2( c)(i i) s ha ll be di strib ut ed* * * t o the Mem be rs inacco rd an ce wi th Sect io n 6 .02 .” Sect io n 6 .02 of t he Hol di ng s Ag reem en t i s en ti tl ed“ Dis tri bu ti on s.” Se ct io n 6.0 2( a) s ta te s “ [e]xce ptas p ro vi de d i n S ect io n 6 .03 an d s ub ject t o * * * th e pr ov is io ns of s ect io n 6 .02 (c) * * * th e Exe cu ti ve Co m mitte e sh al l h av e th e so le
au th or ity to ap pr ov e th e m ak in g o f di strib ut io ns to th e Me m be rs ”. Sect io n 6 .02 (a)- 25 -

st at es “ [a]ll di strib ut io ns m ad e in acco rd an ce wi th th e te rm s o f th is Sect io n 6 .02 sh al l b e m ad e in th e fo ll owi ng ord er o f pr io rit y :” (1) each m em be r sh al l re cei ve a di st rib ut io n i n the am ou ntof i ts pri or ity cap it al co nt rib ut io ns an d a20 %
cu m ul at iv e an nu al pre ferr edreturn the reo n; an d (2 ) “ [t]he reaf te r, an y rem ai ni ng am ountsh al l b e d is tri bu te d t o the Mem be rs inpro po rti on to th ei r th encurren t Perc en ta ge Int eres ts at t he ti m e o f su chdi st rib ut io n.” App en di x A o f th e Hol di ng s Ag reem en t d efi ne s p rio rit y cap it al
co nt rib ut io ns as a ny capi ta l co nt rib ut io n m ad e b y a m em be r pu rs ua ntto sec ti on 4.0 2. Se ct io n 4 .02 pro vi de s tha t the m em be rs of C res cen t Ho ld in gs m ay be reque st edto m ak e ad di ti on al cap it al co nt rib ut io ns . In h is op en in g b rie f
res po nd en t re qu es te d a s a p ro po se d fa ctth atno pri or ity cap it al co nt rib ut io ns were m ad e to Cres cen t Ho ld in gs on or b efo re Se pt em be r 7, 2 00 6. In te rv en ordi d n ot ob ject t o thi s p ro po se d fa ct ; an d n ot hi ng inth e rec or d i nd ic at es th ata pr io rit y cap it al co nt rib ut io n was m ad e o n o r be fo re Se pt em be r 7, 2 00 6. Th eref

or e, we fi nd th atno pri or ity

cap it al co nt rib ut io ns were m ad e o n o r be fo re Se pt em be r 7, 2 00 6. Sect io n 6 .02 (a) o f th e Hol di ng s Ag reem en t i nd ic at es th at , abs en t p rio rit y cap it al co nt rib ut io ns , th e m em be rs are en ti tl edto rece iv e a l iqui da ti on di st rib ut io n equa l t o the ir p erce nt ag e in te res t. At the ti m e o f fo rm at io n, p et it io ne r ha d an in it ia l p erce nt ag e in te res t o f 2%. Th eref or e, res po nd en t ar gu es th atpe ti ti on er- 26 -

wou ldha ve rece iv ed2% o f th e d is tri bu ti on s fr om th e p ro ceed s o f a h y

po th et ic al li qu id at io n o n S ep te m

be r 7, 2 00 6. Re sp on de ntinhi s o pe ni ng bri ef d es cri be s the ab ov e-m en ti on edsec ti on s o f th e Hol di ng s Ag reem en t an d c on cl ud es th atsi nc e pe ti ti on er wo ul d h av e rec ei ve d adi strib ut io n fr om a hypo th et ic al li qu id at io n o n Sep te m be r 7, 2 00 6, the n p et it io ne r’s in te res t was a cap it al in te res t as de fin edby Rev . Pro c. 93 -2 7. In te rv en ordi sa gr ees . Int erv en orno te s tha t p et it io ne r di d n otco nt rib ut e an y m on ey to rece iv e h is in te res t an d h e was no t cr ed it edwith abe gi nn in g c ap it al
acco un t b al an ce. In te rv en orsu m m ari ly argu es th atif C res cen t Ho ld in gs ha d li qu id at edon Sep te m

be r 7, 2 00 6, p et it io ne r wou ldno t h av e h ada ba lanc e in hi s cap it al acco un t an d, the refo re, wo ul d n otha ve rece iv eda di st rib ut io n u nd er se ct io n 6 .02 (c) o f th e Hol di ng s Ag reem en t. Sect io n 6 .02 (c) o f th e Hol di ng s Ag reem en t s tate s: “ The Mem be rs ackno wled ge an d a gr ee tha t, u nl es s the Exec ut iv e Co m m it te e d et erm in es ot he rwis e an d e xc ep t as othe rwis e p ro vi de d i n S ect io n 6 .8(d ) of th e Fo rm at io n Agr eem en t, the Co m

pany sha ll m ak e an nu al di st rib ut io ns ”. Sect io n 6 .02 (c) the n 1 4 pr ov id es th atth e am ou ntof the an nu al di st rib ut io ns wil l b e th e le ss er o f: (1 ) th e
Sec. 6 .02 (c) p ro vi de s tha t the an nu al di st rib ut io n i s m ad e ev ery fis cal y ear 1 4 as so on as p ract ic ab le fol lo win g the en d o f th e fi sc al y ear.- 27 -

m ax im um am ountpe rm it te d und er the Dela ware Li m it edLiab il ity Co m pa ny Act
an d u nd er l oa n andothe r cre di t ag reem en ts ; an d (2 ) anam ou ntth atis ba se d o n the
un returne d c ap it al of C res cen t Ho ld in gs an d p rio rit y cap it al co nt rib ut io ns . 1 5 In te rv en ordo es no t el ab or at e o r ex pl ai n wh y itbe li ev es sec ti on 6.0 2( c) wo ul d pr ev en t p et it io ne r fro m

rece iv in g adi st rib ut io n i n ahypo th et ic al li qu id at io n o n Sep te m be r 7, 2 00 6. In te rv en or ’s rel ianc e o n s ect io n 6 .02 (c) i s i napp os it e. Sect io n 6 .02 (c) de te rm in es on ly the am ou ntof t he to ta l d is tri bu ti on to all m em be rs . Sect io n 6.0 2( c)(v ) st at es “ th e Exe cu ti ve Co m m itte e sh al l au th or iz e fo r di strib ut io n t o the Mem be rs inacco rd an ce wi th Sect io n 6 .02 (a) an a gg reg at e am ou nt ”. (Em ph as is 1 6 ad de d.) Se ct io n 6 .02 (a) d et erm in es to who m th e d is tri bu ti on is m ad e fro m th is ag gr eg at e am ou nt . Sect io n 6 .02 (a) c le arl y st at es th ataft er an am ou ntis di strib ut ed fo r th e return o f pr io rit y

cap it al co nt rib ut io ns , “ th e rem ai ni ng am ou ntsh al l b e di st rib ut edto th e Me m

be rs inpro po rti on to th ei r cu rren t Pe rcen ta ge Int eres ts at th e ti m e o f su chdi st rib ut io n.” Sect io n 6 .02 (a) d oe s n otli m itth e rem ai ni ng
The re were no pri or ity

cap it al co nt rib ut io ns on or b efo re Se pt em be r 7, 1 5 20 06 . There fo re, a h y

po th et ic al li qu id at io n d is tri bu ti on wou ldbe ba se d o n the un returne d c ap it al
. Sec. 6 .02 in di cat es th atth e ag gr eg at e am ou ntis th e to ta l am ou ntth atis 1 6 av ai labl e as anan nu al di st rib ut io n t o the m em be rs .- 28 -

am ountof t he di st rib ut io n t o m em be rs th atha ve co nt rib ut edcap it al to Cres cen t Hol di ng s. Infact , sec ti on 4 o f App en di x E s pe ci fic al ly pro vi de s tha t p et it io ne r is
en ti tl edto di st rib ut io ns fro m Cres cen t Ho ld in gs inpro po rti onto hi s p erce nt ag e in te res t an d tha t an y

di st rib ut io ns he rece iv es are n otsubjec t t o fo rfei tu re. Furth erm or e, Exh ib itA to th e Fi el ds Agre em en t al so pro vi de s tha t p et it io ne r’s
en ti tl em en t t o d is tri bu ti on s i s the same as o th er m em be rs . Int erv en or ’s arg um en t th atsec ti on 6.0 2( c) p rev en ts pe ti ti on er fro m rece iv in g adi st rib ut io n i s co nt rad ic te d b y

sec ti on 6.0 2( a) o f th e Hol di ng s Ag reem en t, Se ct io n 4 of Ap pe nd ix E, andExh ib itA to th e Fi el ds Agre em en t. In te rv en or ’s arg um en t al so fai ls be cau se App en di x A o f th e Hol di ng s Agr eem en t d efi ne s u nr eturne d c ap it al interm s o f th e unr eturne d c ap it al of Cres cen t Ho ld in gs , no t i n t erm s o f th e in di vi du al m em be rs . Sect io n 6 .02 (c) de te rm in es th e am ou ntof t he di st rib ut io n, wh ic h i s, i n p art , bas edon un returne d cap it al . Howev er, Ap pe nd ix A clea rly defi ne s u nr eturne d c ap it al interm s o f th e un returne d c ap it al of C res cen t Ho ld in gs . This am ou ntis th endi st rib ut edto th e m em be rs inacco rd an ce wi th sec ti on 6.0 2( a). The refo re, i nt erv en or ’s rel ianc e o n th e te rm “un returne d c ap it al ” in de te rm in in g the am ountof t he di st rib ut io n t o an in di vi du al m em

be r is m is pl aced
.- 29 -

The Hol di ng s Ag reem en t i nd ic at es th atif C res cen t Ho ld in gs ha d l iqui da te d
on Sep te m

be r 7, 2 00 6, p et it io ne r wou ldha ve rece iv eda sh are o f th e p ro ceed s. 1 7 Acco rd in gl y , we ho ldth atpe ti ti on er’s i nt eres t i n C res cen t Ho ld in gs wou ldha ve en ti tl edhi m

to rece iv e a d is tri bu ti on if C res cen t Ho ld in gs ha d l iqui da te d o n Sep te m be r 7, 2 00 6. As a res ul t, p et it io ne r’s in te res t i n C res cen t Ho ld in gs is a cap it al in te res t as de fin edby Rev. Pro c. 93 -2 7. There fo re, we h ol d tha t Re v. 1 8 Pro c. 20 01 -4 3 andRev . Pro c. 93 -2 7 are n otap pl ic ab le to ou r an al y si s i n de te rm in in g wh ethe r pe ti ti on er s ho ul d re co gn iz e in in co m e th e p artne rs hi p p ro fit s an d l os se s al lo cat edto th e 2 % in te res t. Pro vi si on s Go ve rn in g aNon ve st edPartne rs hi p C ap it al Int eres t Pet it io ne rs an d re sp on de ntarg ue th atsec ti on 1.8 3- 1( a)(1 ), In co m e Tax Reg s., p ro vi de s tha t p et it io ne r was no t the own er o f th e in te res t fo r pu rp os es of in co m e rec og ni ti on . Int erv en orarg ue s tha t s ect io n 1 .72 1- 1( b) (1 ), In co m e Tax App en di x E o f th e Hol di ng s Ag reem en t p ro vi de s tha t i f pe ti ti on er d ie d, 1 7 be cam e d is ab le d, was term in at ed , or the re was a cert ai n c ha ng e in co nt ro l o f Cres cen t Ho ld in gs , th enhe wou ldimm ed ia te ly ves t i n the 2% i nt eres t. We no te th atall owi ng pe ti ti on er t o re cei ve a di st rib ut io n i f Cre sc en t Ho ld in gs li qu id at edis co ns is te ntwith Ap pe nd ix E, whic h e ss en ti al ly pro vi de s tha t i f, th ro ug h n o in it ia ti ve of h is own , pet it io ne r co ul d n otful fil l h is ten ur e as ch ie f ex ecu ti ve of fic er, h e wou ldimm ed ia te ly ves t i n the 2% i nt eres t. Si nc e we fi ndth atpe ti ti on er’s i nt eres t i s a c ap it al in te res t, we n eedno t 1 8 de ci de whet he r se c. 83 ap pl ie s t o p artne rs hi p p ro fitin te res ts .- 30 -

Reg s., p ro vi de s tha t p et it io ne r was th e o wne r. W e m us t fi rs t d eci de whethe r se ct io n 8 3 app li es to th e tr an sf er o f a p artne rs hi p c ap it al in te res t i n e xc ha ng e fo r se rv ic es . Sect io n 8 3 Sect io n 8 3( a) g en eral ly pro vi de s tha t wh ere p ro pe rty is tran sf erre d t o a ta xp ay er i n c on ne ct io n wi th th e p erfo rm an ce o f se rv ic es , th e fai r m ark etva lu e o f th e p ro pe rty, les s the am ou ntpa idforth e p ro pe rty, sha ll be in cl ud edinth e ta xp ay er’s g ro ss in co m e in th e fi rs t t ax ab le y ear i n wh ic h the tax pa y er’s ri gh ts in th e p ro pe rty are “ trans ferabl e o r are no t s ub ject t o asubs tant ia l ri skof f or fei tu re”. Sect io n 8 3( a) i s a d eferral pro vi si on th atall ows a ta xp ay er t o d eferreco gn it io n o f in co m e to th e ta xabl e y ear i n wh ic h h is in te res t i n the pro pe rty is tran sf erab le or no lo ng er s ub

ject t o asubs tant ia l ri skof f or fei tu re. 1 9 Sect io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., p ro vi de s tha t “ [u ]nti l s uc h p ro pe rty be co m es subs tant ia ll y

ve st ed , th e tr an sf

ero r sh al l b e reg ard edas t he own er o f su ch Sec. 8 3( a) d eferral tre atm en t i s n otm an da to ry . Sec. 8 3( b) all ows a 1 9 ta xp ay er t o e le ctou t o f th e se c. 83 (a) d eferral an d re co gn iz e th e fai r m ark etva lu e of th e p ro pe rty, les s an y

am ou ntpa idforth e p ro pe rty, as g ro ss in co m e in th e ta xabl e y ear the pro pe rty is tran sf erre d. Th e ta xp ay er m

us t el ectth is tre atm en t b y fil in g an e le ct io n wi th th e Co m m is si on er n o l at er tha n 3 0 d ay s af te r th e d at e o f th e tra ns fer. Sec . 83 (b )(2 ). If anele ct io n i s n otm ad e und er s ec. 8 3( b) , th ena ta xp ay er wi ll reco gn iz e th e in co m e und er s ec. 8 3( a). Pet it io ne r di d n otfil e a s ec. 83 (b ) el ect io n. Th eref

or e, th e 2 % in te res t wi ll be subjec t t o s ec. 8 3( a) treat m en t i f se c. 83 is ap pl ic ab le to th e 2 % in te res t.- 31 -

pr op erty ”. Sect io n 1 .83 -3 (b ), In co m e Tax Reg s., p ro vi de s tha t “ [p ]rop erty is
subs tant ia ll y

ve st edforsu chpu rp os es when itis eit he r tr an sf erab le or n otsubjec t to a subs tant ia l ri skof f

or fei tu re.” As a res ul t, fo r in co m e rec og ni ti on purp os es th e tr an sf ero r of th e p ro pe rty is re ga rd edas the own er o f th e p ro pe rty un ti l the pr op erty be co m es subs tant ia ll y

ve st ed
. Thi s C ou rt h as he ldth ata pa rtn ers hi p c ap it al in te res t i s p ro pe rty for pu rp os es of s ect io n 8 3. Se e, e.g ., Larso n v . Comm is si on er, T.C. Mem o. 1 98 8- 38 7, 19 88 Tax C t. Me m o LEXIS 4 18 , at * 7 (“ Und er s ect io n 8 3, a c om pe ns at ory tra ns fer o f a p artne rs hi p c ap it al in te res t re su lt s i n t ax ab le in co m e to th e tr an sf eree to th e ex te ntth atth e fai r m ark etva lu e o f th e in te res t ex ceed s the am ou ntpa idfor th e in te res t, i n the y ear tha t the rig ht s t o the in te res t ar e tr an sf erab le or n otsubjec t to a subs tant ia l ri skof f

or fei tu re.”)
. Thes e cas es di d n otdi sc us s wh o o wne d the

2 0 pa rtn ers hi p c ap it al in te res t p rio r to itbe co m in g s ub st an ti al ly ves te d, h owe ve r, in th es e cas es th e Co urt ap pl ie d s ect io n 8 3 t o d et erm in e th e ta xabl e y ear i n wh ic h the tra ns fere e wou ldreco gn iz e in co m e. InHens el Ph el ps Co ns tr. C o. v . Comm is si on er, 7 4 T.C. 9 39 (19 80 ), aff’d, 70 3 F .2d48 5 (1 0th C ir. 1 98 3) , th e ta xp ay er ag reedto co ns tru ctanoff ic e b ui ld in g
W e h av e al so he ldth atsec . 83 ap pl ie s t o o pt io ns to pu rch as e p artne rs hi p 2 0 un it s. See Sch ul m anv. Co m m is si on er, 9 3 T.C. 6 23 , 63 1- 63 5 (1 98 9)
.- 32 -

inex ch an ge for

a 50 % cap it al in te res t i n apartn ers hi p. Id . at 9 47 -9 48 . The pr im ary is su e in Hens el Ph el ps was wh ethe r th e ta xp ay er re cei ve d i ts partn ers hi p in te res t i n 1 97 3 o r 19 74 . Id. at94 7. Th e Co urt s ta te d tha t the pe rfo rm an ce o f
se rv ic es inex ch an ge fora pa rtn ers hi p c ap it al in te res t was a ta xabl e ev en t u nd er se ct io n 6 1, ci ti ng sec ti on1.7 21 -1 (b )(1 ), In co m e Tax Reg s., fo r supp ort. Id . The Co urt fo un d a s a f

actth atth e ta xp ay er rec ei ve d i ts partn ers hi p i nt eres t i n 1 97 4 and he ldth atun de r se ct io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., the tax pa y er re al iz ed ta xabl e in co m e in 19 74 . Id. at94 8. Ho wev er, the Co urt n ot edth atev enif the ta xp ay er h adrece iv edit s p artne rs hi p i nt eres t i n 1 97 3, atth atti m e th e in te res t wou ldha ve be en“ no nt ran sf erab le withi n the m ean in g o f se ct io n 8 3( c)(2 ).” Id . at 95 3. Itwas n otun ti l 1 97 4 tha t the tax pa y er’s i nt eres t was tra ns ferabl e o r no t subjec t t o asubs tant ia l ri skof f or fei tu re wi th inth e m ean in g o f se ct io n 8 3( c). Id
.

“ Co ns eque nt ly, pu rs uantto sec ti on 83 , th e ta xabl e ev en t o ccu rreddu rin g * * * 19 74 ”. Id
. InMarkIV Pic tu res , Inc . v. Co m m is si on er, 1 99 0 Tax Ct. M em o LEXIS 64 3, at*2 1, the tax pay ers rece iv edcap it al in te res ts inli m it edpartn ers hi ps in
ex ch an ge forservi ces . The Co urt n ot edth atsec ti on 1.7 21 -1 (b )(1 ), In co m e Tax Reg s., p ro vi de s fo r th e am ou ntof t he in co m e to be reco gn iz edun de r se ct io n 6 1. Id . at * 21 -* 22 . The t ax pa y ers arg ue d tha t the ir c ap it al in te res ts were s ub ject t o a- 33 -

subs tant ia l ri skof f

or fei ture an d thu s s ect io n 8 3 p recl ud edth e rec og ni ti on of in co m e fo r th e y ears at i ss ue . The Co urt an al yzedth e cap it al in te res ts un de r se ct io n 8 3 andde te rm in edth atth e “ in te res ts were fre el y tra ns ferabl e an d n ot subjec t t o s ub st an ti al ris k o f fo rfei tu re.” Id . at * 24
. Hen se l Ph el ps Co ns tr. C o. an d M arkIV Pic tu res , Inc . hel d tha t s ect io n 1.7 21 -1 (b )(1 ), In co m e Tax Reg s., requi res in co m e to be real iz edun de r se ct io n 6 1 whe n apartn ers hi p c ap it al in te res t i s re cei ve d i n e xc ha ng e fo r se rv ic es . Howev er, th es e cas es pro vi de th atsec ti on 83 go ve rn s the ti m in g o f whe n t o re co gn iz e in co m e fro m

th e rec ei ptof apartn ers hi p c ap it al in te res t s ub ject t o asubs tant ia l ris k o f fo rfei tu re. InCam pb el l v . Comm is si on er, T.C. Mem o. 1 99 0- 16 2, 1 99 0 Tax Ct. M em o LEXIS 14 4, at*5 2- *5 3, af f’d in part, re v’d i n p art , 94 3 F .2d81 5 (8 thCir . 19 91 ), th e ta xp ay er re cei ve d p artne rs hi p p ro fitin te res ts inex ch an ge forservi ces . The Co urt n ot edth atun de r St at e la w andth e Uni fo rm Lim it edPartne rs hi p Actany pa rtn ers hi p i nt eres t i s p ers on al pro pe rty. Id. at * 64 . The Co urt h el d tha t pa rtn ers hi p c ap it al in te res ts an d p ro fitin te res ts are p ers on al pro pe rty and“ are li te ral ly w ithi n the term s o f se ct io n 8 3.” Id. at*6 5. As a res ul t, the Co urt co nc lu de d tha t the tax pa y er’s p artne rs hi p p ro fitin te res ts were p ro pe rty with inth e- 34 -

m ean in g o f se ct io n 8 3 andsh ou ldha ve be enin cl ud edinin co m e und er s ect io n 8 3. Id . at * 64 -* 67 , *7 8. On ap pe al th e Co urt o f App eal s fo r th e Eig ht h C irc ui t n ot edth at“ so m e qu es ti on ex is ts as t o the ap pl ic ab il ity of s ect io n 8 3 t o aservi ce p artne r’s rece ip t o f a p ro fit s i nt eres t. * * * Argu ab ly, th e se ct io n 1 .72 1- 1( b) (1 ) di st in ct io n b etween cap it al an d p ro fit s i nt eres ts an d the reg ul at io ns un de r se ct io n 8 3 c reat e th e im pl ic at io n tha t a p ro fit s i nt eres t i s n otpro pe rty subjec t t o s ect io n 8 3.” Cam pb el l v. Co m m is si on er, 9 43 F.2dat 8 21 n.7 . As p ert in en t t o thi s ca se , th e co urt the n 2 1 st at edth ata pa rtn ers hi p c ap it al in te res t was anin te res t i n i nt an gi bl e p ers on al pr op erty ; the refo re, “ th e rec ei ptof acap it al in te res t ap pe ars to be tax ab le un de r th e au th or ity of s ect io n 8 3 o f th e In te rn al Rev enue Co de .” Id . at 8 20 . The Co urt o f App eal s re ve rs edth e Tax Co urt’s d eci si onbe cau se itfou ndth atth e ta xp ay er’s pa rtn ers hi p p ro fit s i nt eres ts di d n otha ve a fai r m ark etva lu e atth e ti m e h e rec ei ve d th em ; the refo re, the tax pa y er d idno t h av e in co m e. Id . at 8 23
. Inth es e o pi ni on s the Tax C ou rt a ndth e Co urt o f App eal s fo r th e Eig ht h Ci rcu itha ve in di cat edth atsec ti on 83 ap pl ie s t o p artne rs hi p c ap it al in te res ts . Res po nd en t ci te d the ab ov e-m en ti on edop in io ns , exc ep t fo r Cam pb el l, i n h is W e h av e fo un d tha t p et it io ne r’s in te res t i n C res cen t Ho ld in gs was acap it al 2 1 in te res t. The refo re, we d o n otne edto de ci de whet he r se c. 83 ap pl ie s t o a pa rtn ers hi p p ro fit s i nt eres t.- 35 -

op en in g b rie f. Int erv en ordi d n otdi sc us s the se cas es no r ci te an y cas e whe re the Co urt h el d tha t s ect io n 8 3 was no t ap pl ic ab le to a pa rtn ers hi p c ap it al in te res t. In st ead , in te rv en orarg ue s tha t s ect io ns 1.8 3- 1( a)(1 ) an d 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., are inco nf li ct . Int erv en orno te s tha t s ect io n 1 .83 -1 (a)( 1) , In co m e Tax Reg s., i nc lu de s the st at em en t “ [u ]nti l s uc h p ro pe rty beco m es subs tant ia ll y

ve st ed , th e tr an sf

ero r sh al l b e reg ard edas t he own er o f su ch pr op erty ,” whe reas sec ti on 1.7 21 -1 (b )(1 ), In co m e Tax Reg s., d oe s n otin cl ud e an y st at em en t re ga rd in g wh o i s t o b e reg ard edas t he own er o f th e p ro pe rty befo re i t be co m es subs tant ia ll y

ve st ed . Int erv en orarg ue s the ab se nc e o f th is lan gu ag e in
se ct io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., i nd ic at es th atth e tr an sf eree sh ou ldbe
co ns id eredth e o wne r of

th e p artne rs hi p i nt eres t b efo re i t b eco m es subs tant ia ll y ve st ed . Int erv en orarg ue s tha t the Co urt s ho ul d app ly sect io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., b ecau se itsp eci fic al ly app li es to th e tr an sf er o f anin te res t i n pa rtn ers hi p c ap it al as c om pe ns at io n fo r se rv ic es wher eas sec ti on83 an d s ect io n 1.8 3- 1( a)(1 ), In co m e Tax Reg s., are ge ne ral pro vi si on s tha t d o n otev enm en ti on pa rtn ers hi ps . In te rv en orcit es no cas es to supp ort thi s ar gu m en t. As we have pre vi ou sl y no te d, thi s C ou rt h as he ldth ata pa rtn ers hi p c ap it al in te res t i s p ro pe rty for- 36 -

pu rp os es of s ect io n 8 3. Se e Lars on v. Co m m is si on er, 1 98 8 Tax Ct. M em o LEXIS 41 8, at*7
. In te rv en orarg ue s tha t s ect io n 8 3 d oe s n otap pl y to a tr an sf

er o f pa rtn ers hi p cap it al in te res ts inex ch an ge forservi ces be cau se sec ti on 83 an d i ts leg is la ti ve hi st ory do no t s ta te th atsec ti on 83 ap pl ie s t o p artne rs hi ps or e ve n m en ti on pa rtn ers hi ps . It i s tru e th atsec ti on 83 an d i ts leg is la ti ve hi st ory do no t m en ti on pa rtn ers hi ps . Howev er, a s ta te m en t tha t s ect io n 8 3 app li es to partn ers hi ps is no t ne ces sa ry be cau se sec ti on 83 (a) e xp li ci tl y st at es : “ If, in co nn ect io n wi th th e pe rfo rm an ce o f se rv ic es , pro pe rty is tran sf erre d t o any pers on ”. (Em ph as is ad de d.) Sect io n 8 3 u se s the term

“pr op erty ”, whi chis bro ad . Sect io n 1 .83 -3 (e), In co m e Tax Reg s., p ro vi de s tha t “ [f]or p ur po se s o f se ct io n 8 3 andth e reg ul at io ns th ereu nd er, the term

‘ pr op erty ’ in cl ud es real an d p ers on al pro pe rty oth er tha n ei th er m on ey

or a n unf un de d andun se cu redpro m is e to pay m on ey or p ro pe rty in th e fu tu re.” Cres cen t Ho ld in gs is a Delaware l im it edli ab il ity co m pa ny. Del. 2 2 Co de Ann . ti t. 6 , sec . 18 -7 01 (20 05 ) st at es th ata “ li m it edli ab il ity co m pa ny

W e n ot e th atpro po se d re gu la ti on s i ss ue d o n M ay 24 , 20 05 , “pr ov id e th ata 2 2 pa rtn ers hi p i nt eres t i s p ro pe rty with inth e m ean in g o f se ct io n 8 3, an d tha t the tra ns fer o f a p artne rs hi p i nt eres t i n c on ne ct io n wi th th e p erfo rm an ce o f se rv ic es is subjec t t o s ect io n 8 3.” 70 Fed . Reg . 29 67 6 (M ay 24 , 20 05 ).- 37 -

in te res t i s p ers on al pro pe rty.” The Del aware st atut e cl as si fy in g p et it io ne r’s 2 3 in te res t i n C res cen t Ho ld in gs as p ers on al pro pe rty m ean s p et it io ne r’s in te res t i s

“ li te ral ly w ithi n the term s o f se ct io n 8 3.” Cam pb el l v . Comm is si on er, 1 99 0 Tax Ct . Mem o LEXIS 1 44 , at * 64 -* 65 (no ti ng th atun de r St at e law a pa rtn ers hi p cap it al in te res t was pe rs on al pro pe rty andwas the refo re p ro pe rty for p ur po se s o f
se ct io n 8 3)
. In te rv en orarg ue s tha t the di sc us si on of r es tri ct edst oc k p lans inH.R. Rep t. No. 9 1- 41 3, at86 (19 69 ), 19 69 -3 C.B. (Part 1 ) 20 0, 2 54 , in di cat es th atCo ng res s di d n otin te ndsec ti on 83 to ap pl y to partn ers hi ps . Howev er, fu rth er re vi ew of th e le gi sl at iv e h is to ry

to sec ti on 83 sh ows th atH.R. Con f. Rep t. No . 91 -7 82 , at 3 03 (1 96 9) , 19 69 -3 C.B. 6 44 , 65 9, s ta te s “ [t]he Hou se bi ll pro vi de s tha t a p ers on who
rece iv es co m

pe ns at io n i n the form

of p ro pe rty, suc h a s s to ck ”. (Em ph as is ad de d.) The us e o f th e p hr as e “pr op erty , su chas s to ck ” in H.R. Con f. Rep t. No . 91 -7 82 in di cat es th atCo ng res s i nt en de d tha t s to ckis m erel y on e o f th e types of p ro pe rty se ct io n 8 3 app li es to , no t the on ly ty pe of p ro pe rty subjec t t o s ect io n 8 3. Se e al so Mo nt el ep re Syste m ed , Inc . v. Co m m is si on er, T.C. Mem o. 1 99 1- 46 , 19 91 Tax C t. Mem o LEXIS 6 5, at*1 1 (“ It i s cl ear, h owe ve r, th atCo ng res s i nt en de d s ect io n 8 3

Infact , sec . 5.0 3 o f th e Hol di ng s Ag reem en t al so pro vi de s tha t the 2 3 “ in te res ts of a ll Mem

be rs inth e Co m

pa ny are pe rs on al pro pe rty.”- 38 -

to ap pl y to all res tri ct ed‘ pr op erty ,’ no t ju stst oc k.” ), aff’d, 9 56 F.2d49 6 (5 th Cir
. 19 92 ). Thi s i s fu rth er ev id en cedby the factth atth e d is cu ss io ns of s ect io n 8 3 i n H.R. Rep t. No . 91 -4 13 an d H.R. Co nf . Rep t. No . 91 -7 82 are b ot h s ub ti tl ed

“ Res tri ct edPro pe rty”, no t re st ric te d s to ck
. 2 4 Reg ard le ss of C on gr es s’ in te nt io n tha t i nt erv en or att em pt s t o g le anfro m

th e le gi sl at iv e h is to ry , th e lang ua ge of s ect io n 8 3, en act edby Con gr es s, i s cl ear: se ct io n 8 3 app li es to pro pe rty. “ In de ed , if Co ng res s i nt en de d s ect io n 8 3( a) t o ap pl y so le ly to re st ric te d s to ckus edto co m pe ns at e em

pl oyees, i t co ul d h av e u se d
m uc h n arro wer l an gu ag e. In st ead , Con gr es s m ad e se ct io n 8 3( a) ap pl ic ab le to all
res tri ct ed‘ pr op erty ,’ no t ju stst oc k; to pro pe rty tran sf erre d t o ‘an y

pe rs on ,’ no t ju st em pl oyees” . Alv es v. Co m

m is si on er, 7 34 F.2d47 8, 4 81 -4 82 (9t h C ir. 1 98 4) , aff’g 79 T.C. 86 4 (1 98 2) . Int erv en or ’s sea rch th ro ug h the leg is la ti ve hi st ory to fin d wha t Co ng res s d idan d d idno t i nt en d s ect io n 8 3 t o app ly to i s m is di rect ed
.

Furth er s up po rt i s fo un d i n aco m m en t m ad e in th e Sen at e Fi na nc e 2 4 Co m m it te e’s rep ort co nc ern in g the en act m en t o f se c. 70 7( a)(2 ): “ if apartn er rece iv edanin te res t i n apartn ers hi p i n e xc ha ng e fo r se rv ic es , he m ay reco gn iz e in co m e upo n tha t re cei pt . See s ect io ns 61 an d 8 3” . S. Comm . onFin an ce, Defi ci t Reduc ti onAct o f 19 84 , Exp lana ti on of P ro vi si on s Ap pr ov edby the Co m m it te e o n Mar ch21 , 19 84 , S. Prt. 9 8- 16 9 (Vo l. 1 ), at22 6 n .4 (S . Comm . Prin t 1 98 4)
.- 39 -

Lim it at io ns to th e ap pl ic ab il ity of s ect io n 8 3 are fo un d i n s ect io n 8 3( e). Non e o f 2 5 th e li m it at io ns fou ndinsec ti on83 (e) ap pl y to th e in st an t ca se . “ W e h av e h el d tha t se ct io n 8 3 s ho ul d b e g iv enbro adap pl ic at io n s o a s t o c ov er tran sf ers no t sp eci fic al ly excep te d.” Mo nt el ep re Syste m ed , Inc . v. Co m m is si on er, 1 99 1 Tax Ct. Mem o LEXIS 6 5, at*1 7. Sect io n 8 3 g ov ern s the ti m in g o f in co m e rec og ni ti on when pro pe rty is tra ns ferr edinex ch an ge forservi ces . Sect io n 7 21 pro vi de s tha t the co nt rib ut io n o f pr op erty to a pa rtn ers hi p i n e xc ha ng e fo r anin te res t i n the partn ers hi p i s a no nr eco gn it io n e ve ntforth e p artne r an d p artne rs hi p. Se ct io n 8 3 d oe s n otco nf li ct with s ect io n 7 21
.

SEC. 8 3( e). App li cab il ity of S ect io n.-- Thi s s ect io n s ha ll no t ap pl y to -- 2 5 (1 ) a tran sa ct io n t o wh ic h s ect io n 4 21 ap pl ie s, (2 ) a tran sf

er t o o r fro m

a trus t d es cri be d i n s ect io n 4 01 (a) o r a tra ns fer u nd er anan nu ity pl anwhi chm eet s the requi rem en ts of se ct io n 4 04 (a)( 2) , (3 ) th e tr an sf

er o f anop ti on witho uta read il y asc ert ai nabl e fai r m ark etva lu e, (4 ) th e tr an sf

er o f pr op erty

pu rs ua ntto th e ex erci se of a n o pt io n with aread il y

asc ert ai nabl e fai r m ark etva lu e atth e d at e o f gr an t, o r (5 ) gr oup- te rm

li fe i ns ur an ce t o wh ic h s ect io n 7 9 app li es .- 40 -

W e h av e p rev io us ly app li edsec ti on 83 to partn ers hi p c ap it al in te res ts . See Lars on v. Co m

m is si on er, 1 98 8 Tax Ct. M em o LEXIS 4 18 , at * 7; see als o Sch ul m anv. Co m

mis si on er, 9 3 T.C. 6 23 , 63 1- 63 5 (1 98 9) (se ct io n 8 3 app li es to op ti on s t o p ur ch as e p artne rs hi p u ni ts ). Nothi ng inth e la ng ua ge of s ect io n 8 3 o r it s le gi sl at iv e h is to ry

in di cat es th atCo ng res s d idno t i nt en d fo r se ct io n 8 3 t o app ly to pa rtn ers hi ps . Accor di ng ly, we ho ldth atsec ti on 83 ap pl ie s t o the tra ns fer o f a pa rtn ers hi p c ap it al in te res t i n e xc ha ng e fo r th e p erfo rm an ce o f se rv ic es . All oc at io n o f Und is tri bu te d P artne rs hi p In co m e Sect io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., s ta te s tha t “ an y in co m e fro m

su ch pr op erty rece iv edby the em

pl oyee orin de pe nd en t co nt ract or(orbe ne fic iary th ereo f) o r th e ri gh t t o the us e o f su chpro pe rty by th e em pl oyee orin de pe nd en t co nt ract or

co ns ti tu te s ad di ti on al co m pe ns at io n andsh al l b e in cl ud edinth e g ro ss in co m e o f su chem

pl oyee or in de pe nd en t co nt ract orforth e ta xabl e y ear i n wh ic h
su chin co m e is rece iv edor s uc h u se is m ad e av ai labl e.” As ares ul t, i f th e tra ns fere e rec ei ve s an actua l d is tri bu ti on of i nc om e fro m th e p ro pe rty befo re h is rig htis subs tant ia ll y

ve st ed , th enth is in co m e is tre at edas a dd it io na l co m pe ns at io n an d the tra ns fere e m

us t i nc lu de itinhi s g ro ss in co m e in th e y ear r ecei ve d. 2 6

W e n ot e th atpe ti ti on er d idno t re cei ve an y actua l d is tri bu ti on s wi th reg ard 2 6 to th e 2 % in te res t i n C res cen t Ho ld in gs .- 41 -

Sect io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., cre at es a di ch ot om y forown ers hi p be twee n the pro pe rty andin co m e actua ll y rece iv edfro m

th e p ro pe rty: ittre at s in co m e th e tr an sf

eree actua ll y

rece iv edfro m

th e p ro pe rty as o wne d b y th e tra ns fere e an d treat s p ro pe rty tha t i s n otsubs tant ia ll y ve st edas o wne d b y

th e tra ns fero r. Inad di ti on to th e d ic ho to m y crea te d b y

sec ti on 1.8 3- 1( a)(1 ), In co m e Tax Reg s., b etweenpro pe rty andin co m e rec ei ve d b y th e tr an sf

eree , th ere e xi st s an ot he r st ream

of p ot en ti al in co m e rec og ni ti on --i nc om e at tri bu tabl e to pro pe rty (s uc h a s a p artne rs hi p i nt eres t) b utno t ac tu al ly dis tri bu te d. Se ct io n 8 3 d oe s n ot sp eci fic al ly addres s wh ethe r rec og ni ti on of u nd is tri bu te d i nc om e at tri bu tabl e to th e p ro pe rty is a ls o d eferred . Sim il arl y , sec ti on 1.8 3- 1( a)(1 ), In co m e Tax Reg s., do es no t ad dr es s wh ethe r in co m e at tri bu tabl e to th e p ro pe rty, butno t ac tu al ly
rece iv edby the tra ns fere e, is in cl ud edinth e g ro ss in co m e o f th e tr an sf eree or t he tra ns fero r. Part ic ul ar t o thi s ca se , sec ti on 1.8 3- 1( a)(1 ), In co m e Tax Reg s., i s s il en t as to whet he r th e d is tri bu ti ve sh are o f pa rtn ers hi p i nc om e at tri bu tabl e to th e no nv es te d 2 % partn ers hi p i nt eres t i s i nc lu de d i n the in co m e o f th e tr an sf ero r orth e tra ns fere e (p et it io ne r). Pet it io ne rs an d re sp on de ntarg ue th atsec ti on 1.8 3- 1( a)(1 ), In co m e Tax Reg s., p ro vi de s tha t p et it io ne r was no t the own er o f th e 2 % in te res t fo r pu rp os es- 42 -

of in co m e rec og ni ti on . There fo re, the y arg ue th atpe ti ti on er s ho ul d n otha ve be en al lo cat edan y

of t he partn ers hi p p ro fit s o r lo ss es attrib ut ab le to th e 2 % in te res t. In it s o pe ni ng bri ef i nt erv en orno te s tha t i f th is reg ul at io n app li es to th e 2 % in te res t, th enpe ti ti on er wo ul d n otbe tre at edas t he own er o f th e in te res t fo r in co m e reco gn it io n p ur

po se s u nt il th e in te res t i s s ub st an ti al ly ves te d. Ho wev er, i nt erv en or arg ue s tha t s ect io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., i s i n c on fli ctwith s ect io n 1.7 21 -1 (b )(1 ), In co m e Tax Reg s. In te rv en orarg ue s tha t s ect io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., ap pl ie s t o the 2% i nt eres t; th eref or e, pe ti ti on er s ho ul d b e al lo cat edth e p artne rs hi p p ro fit s an d l os se s at tri bu tabl e to th e 2 % in te res t. Thi s ap pe ars to be anis su e o f fi rs t i m pr es si on as n o c as e h as sp eci fic al ly deci de d whe th er the tra ns fero r orth e tr an sf eree of ano nv es te d p artne rs hi p c ap it al in te res t
m us t i nc lu de ingro ss in co m e th e und is tri bu te d p artne rs hi p p ro fitor l os s al lo cat io ns att rib ut ab le to th e p artne rs hi p c ap it al in te res t. Sect io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., s ta te s “ [u ]nti l s uc h p ro pe rty be co m es subs tant ia ll y

ve st ed , th e tr an sf

ero r sh al l b e reg ard edas t he own er o f su ch pr op erty ”. The re gu la ti onals o p ro vi de s tha t an y in co m e actua ll y

rece iv edby the tra ns fere e fro m

th e p ro pe rty con st itut es ad di ti on al co m pe ns at io n andis in cl ud edin th e g ro ss in co m e o f th e tr an sf eree . Howev er, the reg ul at io n d oe s n otad dr es s whe th er i nc om e at tri bu tabl e to th e p ro pe rty, butno t ac tu al ly recei ve d b y th e- 43 -

tra ns fere e, is in cl ud edinth e g ro ss in co m e o f th e tr an sf eree or t he tra ns fero r. Altho ug h n ei th er s ect io n 8 3 n orsec ti on1.8 3- 1( a)(1 ), In co m e Tax Reg s., sp eci fic al ly addres s thi s i ss ue , forth e rea so ns be lo w we ho ldth atth e tr an sf ero r of a p artne rs hi p c ap it al in te res t m us t re co gn iz e in in co m e th e und is tri bu te d pa rtn ers hi p p ro fitor l os s al lo cat io ns att rib ut ab le to a no nv es te d c ap it al in te res t. (1 ) The Purp os e o f Sec ti on 83 Is To Defer R eco gn it io n o f In co m e When Prop erty

is Subjec t t o aSubs tant ia l Ri skof F or fei tu re. Sect io n 8 3 i s a d eferral pro vi si on th atde lay s the reco gn it io n o f in co m e to th e ta xabl e y ear i n wh ic h the tra ns fere e’s in te res t i n the pro pe rty is e ithe r tra ns ferabl e o r no t s ub

ject t o asubs tant ia l ri skof f or fei tu re. The po li cy un de rp in ni ng sec ti on 83 is th atitwou ldbe un fai r to requi re a t ax pa y er t o reco gn iz e th e fai r m ark etva lu e o f pr op erty inin co m e if

th e ta xp ay er m ay

ne ve r own th e p ro pe rty.

“ The rig ht s o f a p ers on inpro pe rty are subjec t t o asubs tant ia l ri skof fo rfei tu re i f su chpe rs on ’s rig ht s t o fu ll en joym en t o f su chpro pe rty are co nd it io ne d upo n the futur e p erfo rm an ce o f subs tant ia l s erv ic es by any in di vi du al .” Sec. 8 3( c)(1 ); s ee al so sec . 1.8 3- 3( c), In co m e Tax Reg s. When Cres cen t Ho ld in gs was fo rm ed , pet it io ne r was th e p res id en t an d c hi ef ex ecu ti ve of fic er o f Cre sc en t Re so ur ces . Cres cen t Re so ur ces was t o b eco m e th e p rimary- 44 -

as se t o f Cre sc en t Ho ld in gs . Exh ib itA to th e Fi el ds Agre em en t s ta te d tha t the 2% in te res t wo ul d b e fo rfei te d i f pe ti ti on er t erm in at edhi s emplo ym en t wi th Cres cen t Res ources be fo re Se pt em be r 7, 2 00 9. Th eref

or e, th e 2 % in te res t was co nd it io ne d up on pe ti ti on er’s fu tu re p erfo rm an ce o f subs tant ia l s erv ic es . As a res ul t, the 2% in te res t was subjec t t o asubs tant ia l ri skof f or fei ture. See sec . 83 (c)( 1) ; s ec. 1 .83
- 3( c)(1 ), In co m e Tax Reg s.

“ [T]he ri gh ts of ape rs on inpro pe rty are tr an sf erab le if s uc h p ers on can tra ns fer any int eres t i n the pro pe rty to a ny pers on othe r th anth e tr an sf ero r of th e pr op erty , bu t o nl y

if the rig ht s i n s uc h p ro pe rty of s uc h tran sf eree are n otsubjec t to a subs tant ia l ri skof f

or fei tu re.” Se c. 1.8 3- 3( d) , Inc om e Tax Reg s. Ex hi bi t A t o th e Fi el ds Agre em en t s ta te s tha t p et it io ne r’s “ [i]nt eres ts are n on tra ns ferabl e unl es s an d u nt il for fei tu re re st ric ti on s s ha ll ha ve lap se d” . Peti ti on er re si gn edfro m hi s po si ti onat C res cen t Re so ur ces be fo re the for fei tu re re stric ti on s l ap se d. As a res ul t, the 2% i nt eres t n ev er b ecame tran sf erab le un de r se ct io n 1 .83 -3 (d ), In co m e Tax Reg s. Un de r se ct io n 8 3( a) p et it io ne r di d n otreco gn iz e th e fai r m ark etva lu e of th e 2 % in te res t as in co m e b ecau se th is in te res t n ev er v es te d. Pet it io ne r’s rig htto rece iv e th e und is tri bu te d i nc om e al lo cat io ns att rib ut ab le to th e 2 % in te res t was subjec t t o the same sub st an ti al ris k o f fo rfei ture as hi s ri gh t to th e 2 % in te res t. If p et it io ne r fo rfei te d h is rig htto th e 2 % in te res t, the n h e- 45 -

wou ldals o fo rfei t h is rig htto rece iv e an y be ne fitfro m

th e und is tri bu te d i nc om e al lo cat io ns . In o th er wo rd s, p et it io ne r’s rig htto ev en tu al ly recei ve an y be ne fit fro m th e und is tri bu te d i nc om e al lo cat io ns was e nt ire ly dep en de nton whet he r hi s rig htve st edinth e 2 % in te res t. Whenpe ti ti on er re si gn edfro m hi s p os it io n wi th Cres cen t Re so ur ces , he f

or fei te d h is rig htto th e 2 % in te res t, wh ic h re su lt edinhi m lo si ng an y

rig ht s h e wou ldha ve ha d t o the un di st rib ut edin co m e attri bu tabl e to th e 2% i nt eres t. The refo re, we fi ndth atth e und is tri bu te d i nc om e al lo cat io ns were subjec t t o the same sub st an ti al ris k o f fo rfei tu re as th e 2 % in te res t i n C res cen t Hol di ng s. Th e 2 % in te res t was no t re co gn iz edinpe ti ti on er’s i nc om e b ecau se it
was subjec t t o asubs tant ia l ri skof f or fei tu re. Co ns is te nc y

requi res th atth e un di st rib ut edpartn ers hi p i nc om e al lo cat io ns att rib ut ab le to th e 2 % in te res t, wh ic h
were s ub ject t o the same ris k o f fo rfei tu re, s ho ul d a ls o n otbe reco gn iz edin pe ti ti on er’s i nc om e. If p et it io ne r ha d c on ti nu edhi s emplo ym en t wi th Cres cen t Re so ur ces un ti l Sep te m be r 7, 2 00 9, the n h is in te res t wo ul d h av e v es te d. If t hi s h adoc cu rred , th en un de r se ct io n 8 3( a) p et it io ne r wou ldha ve reco gn iz edth e fai r m ark etva lu e o f hi s pa rtn ers hi p i nt eres t i n g ro ss in co m e in th e 2 00 9 t ax ab le y ear. Th e fai r m ark et va lu e o f th e in te res t i s m eas ur edat t he ti m e th e p ro pe rty beco m es subs tant ia ll y ve st ed , whi chwou ldhave be enon Sep te m be r 7, 2 00 9. Se e se c. 83 (a); sec . 1.8 3-- 46 -

1( a)(1 ), In co m e Tax Reg s. Th e fai r m ark etva lu e o f pe ti ti on er’s i nt eres t o n Sep te m be r 7, 2 00 9, wo ul d h av e b eenen ha nc edby inc om e al lo cab le to hi s i nt eres t fo r whi chno di st rib ut io ns ha d yet b eenpa id
. Si nc e p et it io ne r fo rfei te d h is rig htto th e 2 % in te res t b efo re i t s ub st an ti al ly
ve st ed , he n ev er o wne d the in te res t. Pet it io ne r ne ve r rec ei ve d any of th e eco no m ic be ne fit s fr om

th e und is tri bu te d p artne rs hi p i nc om e al lo cat io ns to th e 2 % in te res t. Requi rin g p et it io ne r to reco gn iz e th e p artne rs hi p a ll oc at io ns inhi s i nc om e is in co ns is te ntwith the factth athe rece iv edno eco no m ic be ne fitfro m th e al lo cat io ns . Whe n p et it io ne r’s in te res t was for fei te d t o C res cen t Ho ld in gs , hi s

2 7 rig htto th e 2 % in te res t an d t o re cei ve an y be ne fitfro m

th e p artne rs hi p i nc om e al lo cat io ns rev ert edto Cres cen t Ho ld in gs . As a res ul t, Cr es cen t Ho ld in gs 2 8
W e n ot e th atCres cen t Ho ld in gs fil edanadve rs ary co m pl ai ntinth e 2 7 ba nkrupt cy

co urt ag ai ns t p et it io ne r, whi chst at ed“ Fi el ds ch os e to termin at e h is em pl oym en t, fo rfei ti ng an y

in te res t i n C res cen t Ho ld in gs , andne ga ti ng hi s i nc om e ta x l iabi li ty aris in g o utof t he for fei te d i nt eres t.” Th e adve rs ary co m pl ai nt ev en tu al ly resu lt edinpe ti ti on er p ay in g $ 60 0,0 00 to th e cre di to rs of C res cen t Hol di ng s an d p ro m is in g t o p ay th e rem ai nd er wh enhe rece iv edrefu nd s fr om th e fil in g o f am en de d re tu rn s fo r th e y ears at i ss ue . It i s i nc on si st en t fo r in te rv en orto ha ve arg ue d t o the bankrupt cy co urt tha t p et it io ne r’s ta x l iabi li ty for the al lo cat io ns to hi s fo rfei te d i nt eres t was ne ga te d andth enarg ue to th is Co urt tha t pe ti ti on er s ho ul d b e li ab le to pay tax onth e in co m e al lo cat edto hi s fo rfei te d in te res t. App en di x E o f th e Hol di ng s Ag reem en t p ro vi de s tha t i f pe ti ti on er

2 8 te rm in at es hi s emplo y

m en t p rio r to Sep te m

be r 7, 2 00 9, h is in te res t wo ul d b e (co nt in ue d...)- 47 -

be cam e equa ll y

own edby D uk e Ven tu res an d M SREF. The rem ai ni ng partn ers , Duk e Ven tu res an d M SREF, rec ei ve d any econ om ic be ne fit s at tri bu tabl e to th e un di st rib ut edin co m e al lo cat io ns . (2 ) Sec ti on 1.8 3- 1( a)(1 ), In co m e Tax Reg s., Do es NotCo nf li ctW ith S ect io n 1.72 1- 1( b) (1 ), In co m e Tax Reg s. In te rv en orarg ue s tha t s ect io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., co nf li ct s with s ect io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., an d s in ce s ect io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., s pe ci fic al ly app li es to partn ers hi ps we sh ou ldap pl y th at reg ul at io n t o d et erm in e who sh ou ldbe all oc at edth e p artne rs hi p p ro fit s an d l os se s at tri bu tabl e to th e 2 % in te res t. Sect io n 7 21 (a) p ro vi de s tha t “ [n ]o ga inor l os s s ha ll be reco gn iz edto a pa rtn ers hi p o r to an y

of i ts partn ers inth e cas e o f a co nt rib ut io n o f pr op erty to th e pa rtn ers hi p i n e xc ha ng e fo r anin te res t i n the partn ers hi p.” (Em ph as is ad de d.) Sect io n 7 21 ap pl ie s t o c on tri bu ti on s o f pr op erty ; i t d oe s n otap pl y to co nt rib ut io ns of servi ces . Sect io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., p ro vi de s tha t the
no nr eco gn it io n treat m en t fo r co nt rib ut io ns of p ro pe rty to apartn ers hi p p ro vi de d by sect io n 7 21 do es no t ap pl y to co nt rib ut io ns of s erv ic es . In o th er wo rd s, the reg ul at io n re qu ire s the servi ce p ro vi de r to reco gn iz e as in co m e th e fai r m ark et (...co nt in ue d) 2 8 fo rfei te d t o C res cen t Ho ld in gs .- 48 -

va lu e o f hi s p artne rs hi p c ap it al in te res t. Sec ti on 1.7 21 -1 (b )(1 ), In co m e Tax Reg s., al so st at es th atth e “ ti m e whe n s uc h i nc om e is real iz edde pe nd s o n a ll th e fac ts an d ci rcu m st an ces , in cl ud in g any sub st an ti al res tri ct io ns or c on di ti on s o n the
co m pe ns at edpartn er’s ri gh t t o wi th dr aw orothe rwis e d is po se of s uc h i nt eres t.” Thi s re gu la ti on pro vi de s n o s ta te m en ts reg ard in g wh o i s treat edas t he own er o f th e p artne rs hi p c ap it al in te res t p rio r to th e cap it al in te res t b eco m in g s ub st an ti al ly
ve st ed . As a res ul t, the pro vi si on insec ti on 1.8 3- 1( a)(1 ), In co m e Tax Reg s., pr ov id in g tha t the tra ns fero r of th e p ro pe rty is treat edas t he own er o f th e p ro pe rty un ti l i t b eco m es subs tant ia ll y ve st ed , do es no t co nf

li ctwith s ect io n 1 .72 1- 1( b) (1 ), In co m e Tax Reg s., o r with s ect io n 7 21
. W e h ol d tha t u nd er s ect io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., u nd is tri bu te d pa rtn ers hi p a ll oc at io ns att rib ut ab le to a no nv es te d p artne rs hi p c ap it al in te res t ar e to be reco gn iz edinth e g ro ss in co m e o f th e tr an sf ero r. 2 9

Pet it io ne r al so arg ue s tha t Cr es cen t Ho ld in gs an d i nt erv en or sh ou ldbe 2 9 jud ic ia ll y est op pe d fr om

ass ert in g tha t p et it io ne r sh ou ldbe all oc at edth e un di st rib ut edpartn ers hi p p ro fit s o r lo ss es be cau se inth e adve rs ary co m pl ai ntfil ed inth e b an krup tc y

co urt Cr es cen t Ho ld in gs arg ue d tha t b ecau se pe ti ti on er fo rfei te d hi s i nt eres t h is in co m e ta x l iabi li ty aris in g o utof t he for fei te d i nt eres t was ne ga te d. Si nc e we h ol d tha t p et it io ne r sh ou ldno t b e al lo cat edan y of t he un di st rib ut ed pa rtn ers hi p p ro fit s an d l os se s at tri bu tabl e to th e 2 % in te res t, we n eedno t ad dr es s th is arg um en t.- 49 -

Id en ti ty of th e Tran sf

ero r Sect io n 1 .83 -1 (a)( 1) , Inc om e Tax Reg s., p ro vi de s tha t the tra ns fero r of pe ti ti on er’s i nt eres t i n C res cen t Ho ld in gs wil l b e tr eat edas t he own er o f pe ti ti on er’s i nt eres t. We m us t fi rs t d et erm in e who th e tr an sf ero r was inord er t o de te rm in e who is all oc at edth e p ro fit s an d l os se s as so ci at edwith p et it io ne r’s 2% in te res t fo r th e y ears at i ss ue . Res po nd en t ar gu es th atDuk e Ven tures was the trans fero r an d thu s pe ti ti on er’s 2 % in te res t i n C res cen t Ho ld in gs sh ou ldbe all oc at edso le ly to Du ke Ven tures . In the alt ern at iv e, res po nd en t ar gu es th atif we fi ndth atCres cen t Hol di ng s was th e tr an sf

ero r th enpe ti ti on er’s 2 % in te res t s ho ul d b e al lo cat ed pr op orti on al ly betweenDuk e Ven tu res an d M SREF. In te rv en orarg ue s tha t Cres cen t Ho ld in gs was the tra ns fero r, th eref or e, pe ti ti on er’s i nt eres t s ho ul d b e al lo cat edon a pr o ra taba si s t o Du ke Ventur es an d M SREF. Pet it io ne r ta ke s n o po si ti onas t o h ow the 2% i nt eres t s ho ul d b e al lo cat ed
. Purs uantto sec ti on 2.2 (a) o f th e Fo rm at io n Ag reem en t Du ke Ventur es co nt rib ut ed10 0% o f it s i nt eres t i n C res cen t Re so ur ces to Cres cen t Ho ld in gs in
ex ch an ge for10 0% o f th e m em be r in te res t i n C res cen t Ho ld in gs . In ac co rd an ce with s ect io n 2 .2(b ) Cre sc en t Ho ld in gs is su edad di ti on al m em be r in te res ts to pe ti ti on er s uc h tha t the Cres cen t Ho ld in gs m em be r in te res ts were h el d 9 8% b y- 50 -

Duk e Ven tu res an d 2 % by pet it io ne r. Pur su an t t o s ect io n 2 .2(d ), Duk e Ven tu res so ld49 % of t he m em

be r in te res t i n C res cen t Ho ld in gs to th e In it ia l M S Members
. Sect io n 2 .2 o f th e Fo rm at io n Ag reem en t cl earl y pro vi de s tha t Cr es cen t Hol di ng s was th e tr an sf

ero r of pe ti ti on er’s 2 % in te res t i n C res cen t Ho ld in gs . Bot h
res po nd en t an d i nt erv en orag ree tha t i f Cre sc en t Ho ld in gs was the trans fero r of pe ti ti on er’s 2 % in te res t, the n the partn ers hi p p ro fit s an d l os se s as so ci at edwith the 2% i nt eres t fo r th e y ears at i ss ue sh ou ldbe all oc at edona pr o ra taba si s t o Du ke Ven tures an d M SREF. Fu rth erm or e, th e 2 % in te res t was for fei te d t o C res cen t Hol di ng s, wh ic h i n turn was own edby D uk e Ven tu res an d M SREF. The refo re, Duk e Ven tu res an d M SREF wi ll bo th rece iv e an y of t he eco no m ic be ne fit s at tri bu tabl e to th e 2 % in te res t. We ho ldth atth e p artne rs hi p i te m s, p ro fit s an d lo ss es an d the FPAA in co m e ad jus tm en ts ass oc ia te d wi th th e 2 % in te res t i n Cres cen t Ho ld in gs forth e y ears at i ss ue sh ou ldbe all oc at edon a pr o ra taba si s t o Duk e Ven tu res an d M SREF. Co nc lu si on Pet it io ne r sh ou ldno t b e reg ard edas t he own er o f th e 2 % in te res t i n Cres cen t Ho ld in gs forth e y ears at i ss ue . As a res ul t, p et it io ne r sh ou ldno t h av e be enall oc at edany

partn ers hi p p ro fit s o r lo ss es forth e y ears at i ss ue . Ins te ad , th e- 51 -

pa rtn ers hi p p ro fit s o r lo ss es ass oc ia te d wi th th e 2 % in te res t s ho ul d b e al lo cat edon a p ro rat a b as is to Duk e Ven tu res an d M SREF. Inreac hi ng ou r de ci si on , we hav e co ns id eredall arg um en ts m ad e b y th e pa rti es , andto th e ex te ntno t m en ti on edor a dd res se d, the y are i rrel ev an t o r witho utm eri t. To re fle ctth e fo reg oi ng , Deci si on s wi ll be en te redun de r Ru le 15 5.