## Facts

- William G. Campbell worked as an officer and employee within the “Summa T. Group,” which formed and syndicated real estate limited partnerships.
- After assuming expanded responsibilities in 1979, Campbell negotiated compensation consisting of (1) 15% of syndication proceeds and (2) small “special limited partnership” interests in partnerships he helped organize and finance.
- Campbell received 1–2% partnership interests in multiple limited partnerships formed for speculative real estate ventures, including a partnership formed to purchase, renovate, and operate a downtown Kansas City hotel.
- The partnership interests were structured as **profits interests**, giving Campbell a share only in future profits and related allocations, rather than a present right to existing partnership capital upon an immediate liquidation.
- The Campbells did not report any income in 1979 or 1980 for receipt of the profits interests.
- The IRS determined income tax deficiencies for 1979 and 1980, treating the fair market value of the profits interests as **ordinary income** when received.
- The Tax Court agreed the interests were taxable upon receipt but rejected the IRS valuation method and substituted its own reduced valuation.
- The Campbells appealed, disputing taxation at receipt; the Commissioner defended taxation at receipt using the Tax Court’s valuation.

## Issues

1. Whether partnership **profits interests** received for services are taxable as ordinary income **upon receipt** when they represent only a contingent right to future profits and have no readily ascertainable fair market value.
2. Whether, on these facts, the Tax Court erred by assigning a present value to the profits interests and including that amount in income in the year of grant.

## Decision

- The Eighth Circuit **affirmed in part and reversed in part** the Tax Court.
- The court held that Campbell’s interests, to the extent they were **pure profits interests** with no present right to existing capital and no reasonably determinable value at grant, were **not taxable compensation upon receipt**.
- The court rejected taxing the interests based on speculative valuation at the time of grant.
- The court left undisturbed other portions of the Tax Court’s deficiency determinations not dependent on treating the profits interests as current taxable income.

## Legal Principles

- A **capital interest** (an interest that would share in proceeds if the partnership liquidated immediately after grant) is generally taxable when received because it has a determinable present value.
- A **profits interest** (a right only to share in future profits and appreciation) may be **non-taxable at grant** when it confers no present claim to existing capital and lacks a readily ascertainable fair market value.
- Income recognition is generally not required upon receipt of an interest whose value is contingent and cannot be determined with reasonable accuracy; taxation is deferred until a later realization event (e.g., distributions or disposition producing determinable income).

## Conclusion

The Eighth Circuit held that granting a pure partnership profits interest for services is not taxable upon receipt when it provides only a contingent right to future profits and lacks an ascertainable value at the time of grant, reversing the Tax Court’s inclusion of such interests in the Campbells’ 1979–1980 income while affirming unaffected portions of the deficiencies.


Campbell v. Comm’r, 943 F.2d 815 (8th Cir. 1991)