Capital interests generally also provide a right to profits. When these two rights are combined, they will be a capital interest. In contrast, at grant, a pure profits interest does not provide the right to liquidation proceeds. Rather it provides the right to receive future profits that may accrue to the partnership. Over time these interests will transmute into capital interests if the profits are not paid out upon receipt.
Many potential pitfalls exist.
It is clear that the transfer of a capital interest in a partnership in connection with service to a corporation will be treated as a transfer of property under Sec. 83 provides the employee with the right to elect to have such an interest treated as vested at grant. By making the election, the employee takes the fair market value of the interest into income at grant and capital gain income may be recognized with respect to any subsequent sale of the interest. However, for most non-tax purposes, the election will not provide the employee with the status of a partner until the interest actually vests. Typically, unvested partnership interests will not give rise to partnership distributions or allocations.