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Abstract: 

It has become increasingly common for partnerships to issue options that give the holder the right to acquire an interest in the partnership for a set price. The holder of the option will exercise it if he feels that the partnership interest to be acquired is worth more than the exercise price. There is a dearth of authority on the federal tax treatment of option transactions, and the Service has recently asked for guidance from the tax bar as to what approach it should take. In this article I will focus on one piece of the partnership option puzzle, options to acquire partnership interests where the option is received in exchange for services (services option). While I will use the term “partnership” throughout this article, I ask the reader to recall that for federal income tax purposes, it normally includes limited liability companies (LLCs) provided they have more than one member.

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Affiliations:  1: University of Baltimore School of Law.