Fifteen and Thirty-Five - Class Warfare in Subchapter K of the Internal Revenue Code: The Taxation of Human Capital Upon the Receipt of a Proprietary Interest in a Business Enterprise‪.‬

Service providers (a.k.a. executives) to partnerships and to corporations confront a number of choices as to how their compensatory arrangement may be structured and the tax consequences thereof. In the simplest case, an individual may render services to an enterprise in return for cash payments over the period of service. In this non-equity setting, the issue is straightforward and non-controversial. The service provider is treated as receiving ordinary income for services rendered. The return on his or her expenditure of human capital is taxed at progressive rates. Once the relationship between the service provider and the enterprise becomes more complicated through the service provider's receipt of an equity interest in the enterprise, the tax treatment of the return becomes more complex. If the service provider receives an equity interest in return for services, the issue of whether the receipt of, and return on, the equity interest is attributable to human capital or invested capital is confronted. A tension arises between conceptualizing the receipt of and return on an equity interest and the economic enhancement which it generates as a return on human capital, generating ordinary income, or as a return on invested capital, which in certain settings may be taxed preferentially as capital gain.