A partner contributes services worth $50,000 in exchange for a 25% capital interest in a partnership. The partnership has no liabilities. What is the partner's recognized income and initial basis in the partnership interest?

Answer options:

$50,000 ordinary income; $50,000 basis.

$0 income; $0 basis.

$0 income; $50,000 basis.

$50,000 capital gain; $50,000 basis.

How to approach this question

Services for Capital Interest = Immediate Ordinary Income (FMV of interest). The amount taxed becomes the Basis.

Full Answer

A.$50,000 ordinary income; $50,000 basis.✓ Correct

Receipt of a capital interest in a partnership in exchange for services is a taxable event. The partner recognizes ordinary income equal to the FMV of the interest received ($50,000). This amount becomes the partner's outside basis.

Common mistakes

Confusing Capital Interest (taxable) with Profits Interest (generally non-taxable).

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