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From the MSSP on partnerships: ( http://www.irs.gov/businesses/partnerships/article/0,,id=134690,00.html#8 )

Payments To A Partner: Receipt of a Capital or Profits Interest

During the course of partnership formation, it is not uncommon for the partner who is to manage the partnership's affairs to receive an interest in partnership profits in exchange for the performance of past or future services. Since it is the combination of labor and capital that creates a business, this is to be expected. Over the years, taxpayers, the Service, and the courts have struggled with the tax consequences of the many variations of these partnership agreements.
A "Bare" Profits Interest ─ An interest in partnership profits with no interest in partnership capital is a "bare" profits interest. Generally, the receipt of a partnership interest in exchange for services is taxable under IRC section 61(a)(1) and Treas. Reg. section 1.61-2(d)(1) as property received for services.
However, Treas. Reg. section 1.61-2(d)(6) provides an exception in the case of property subject to a restriction that has a significant effect on its fair market value under IRC section 83.
A capital interest in a partnership is generally not subject to a substantial risk of forfeiture under IRC section 83 and will not meet the exception. Therefore, it will be included in the income of the recipient at its fair market value (Treas. Reg. section 1.721-1(b)(1)).
Since the value of a profits interest is contingent on the realization of profits in the future, it is difficult to value and is generally considered to be IRC section 83 property. Under IRC section 83, at the time the profit is determined and added to the service partner's capital account, it is taxable to the partner and deductible by the partnership.
To provide further guidance, the Service announced in Rev. Proc. 93-27 that they would not attempt to tax the receipt of a profits interest except where the income is fairly certain, the interest is disposed of within 2 years of receipt, or it is publicly traded.
When is a Partner not a Partner? ─ Rev. Proc. 93-27 did not put an end to all of the controversy regarding receipt of a profits interest. The receipt of a profits interest does not automatically make one a partner. A similar agreement could be made with an independent contractor. Someone who receives a "guaranteed payment" of so much a month plus a percentage of the profits may in fact be an employee with profit -sharing.
Pursuant to Rev. Proc. 93-27, the receipt of a profits interest in exchange for future services should generally be accepted. However, if the partnership appears to be designed primarily to provide tax benefits to one or both parties, careful analysis should be applied to ensure that partner status for tax purposes is warranted.
Regulations regarding performance of services have not yet been issued, but the Section 707 Committee Reports contain significant guidance. The Committee was concerned with transactions that avoid capitalization requirements. Other concerns were situations where a service partner received a portion of partnership capital gains in lieu of a fee, the effect of which converted ordinary income into capital gain. The Committee was not concerned with non-abusive allocations that reflect the various economic contributions of the partners. The rules apply both to one- time transactions and continuing arrangements that utilize purported partnership allocations and distributions in place of direct payments.
The Committee believed that the following factors should be considered in determining if the purported allocation is received by the partner in his or her capacity as a partner.
Generally, the most important factor is whether the payment is subject to an appreciable risk as to amount. An allocation and distribution provided for a service partner which subjects the partner to significant entrepreneurial risk as to both amount and payment generally would be recognized. Other factors indicating that the payment may be a fee include:

• Transitory (temporary or short-term) partner status* The payment is made close in time to the performance of the services* Whether, under all the facts and circumstances, it appears that the recipient became a partner primarily to obtain tax benefits for himself or the partnership which would not have been available had the services been rendered in a third party capacity. The fact that a partner has significant non-tax motives is of no particular significance* The recipient's interest in continuing partnership profits is small in relation to the allocationIn applying these factors, one should be careful not to be misled by self-serving assertions in the partnership agreement, but should look to the substance of the transaction.
  In cases where allocations are only partly related to the performance of services, the above provisions will apply to the portion related to services. Even where the service partner has contributed some capital, the "profits interest" may still be carved out and treated as compensation.
  In Smith Est. et. al. (63-1 U.S.T.C. 9268), the Eighth Circuit Court of Appeals held that a common fund, from which the manager received a percentage of the profits from trading commodities futures, was a partnership but that the manager's share of the profits was compensation, not capital gain. To the extent that partners of the manager invested cash in the common fund, they were entitled to treat the income from their investment as capital gains and losses.