ExpertMedium1 markMultiple Choice
CPA · Question 48 · Area III: Entity Tax Planning
A taxpayer contributes services worth $50,000 in exchange for a 20% capital interest in a new partnership. The partnership has no assets other than the cash contributed by other partners. What is the tax consequence?
A taxpayer contributes services worth $50,000 in exchange for a 20% capital interest in a new partnership. The partnership has no assets other than the cash contributed by other partners. What is the tax consequence?
Answer options:
A.
No income recognized.
B.
$50,000 Capital Gain.
C.
$50,000 Ordinary Income.
D.
Income deferred until partnership interest is sold.
How to approach this question
Services for Capital Interest = Ordinary Income (FMV of interest). Services for Profits Interest = Generally Non-taxable.
Full Answer
C.$50,000 Ordinary Income.✓ Correct
C
Treas. Reg. §1.721-1(b)(1). The receipt of a partnership capital interest in exchange for services is taxable as ordinary income equal to the fair market value of the interest received.
Common mistakes
Confusing capital interest with profits interest.
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