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Under present law, the tax treatment of a partner receiving an interest in a partnership for services is clear. If a partner receives a current interest in a partnership's existing capital in exchange for services rendered, the partner will realize compensation income. The compensation income will be recognized at the time of receipt of the partnership interest, unless there are restrictions, in which case the recognition event may be deferred until such restrictions lapse or are terminated.

If the partner receives only a carried interest in the partnership, the current rules are as follows: 1) Subject to certain logical exceptions, if a person receives a carried interest for the provision of services to or for the benefit of a partnership in a partner capacity or in anticipation of being a partner, the IRS will not treat the receipt of such an interest as a taxable event. 2) The value of the carried interest is tested at the time the interest is granted, regardless of when vested.

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