ExpertMedium1 markMultiple Choice
CPA · Question 49 · Area 4: Entity Taxation
Partner A provides services worth ,000 in exchange for a 20% capital interest in a partnership. The partnership has no liabilities. What are the tax consequences to Partner A?
Partner A provides services worth ,000 in exchange for a 20% capital interest in a partnership. The partnership has no liabilities. What are the tax consequences to Partner A?
Answer options:
A.
No income; Basis of 0.
B.
Ordinary income of ,000; Basis of ,000.
C.
Capital gain of ,000; Basis of ,000.
D.
No income; Basis of ,000.
How to approach this question
Services for Capital Interest = Taxable Ordinary Income (FMV). Services for Profits Interest = Generally Non-taxable (if no immediate liquidation value).
Full Answer
B.Ordinary income of ,000; Basis of ,000.✓ Correct
The receipt of a partnership capital interest in exchange for services is a taxable event. The partner recognizes ordinary income equal to the FMV of the interest received and takes a basis equal to that amount.
Common mistakes
Confusing capital interest (taxable) with profits interest (often not taxable).
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