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:

No income; Basis of 0.

Ordinary income of ,000; Basis of ,000.

Capital gain of ,000; Basis of ,000.

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

Ordinary income of ,000; Basis of ,000.

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).

Question 48 All questions Question 50

Practice the full CPA REG Practice Exam

72 questions · hints · full answers · grading

More questions from this exam

Q01Under Circular 230, which of the following scenarios represents a permissible contingent fee arra...Hard Q02A CPA is preparing a tax return for a client who wishes to take a position that the CPA believes ...Medium Q03Regarding the retention of client records under Circular 230, which of the following statements i...Hard Q04Under the Ultramares rule regarding accountant liability to third parties for negligence, which o...Medium Q05Taxpayer A filed their Year 1 tax return on April 15, Year 2. The return omitted ,000 of gross in...Medium

View all 72 questions →