Scott provides accounting services worth $40,000 to the ABC Partnership in exchange for a 20% interest in the capital and profits of the partnership.The tax result to Scott is
A)a partnership interest with a zero basis and no gain or loss.
B)a partnership interest with a zero basis and $40,000 of ordinary income.
C)a partnership interest with a $40,000 basis and $40,000 capital gain.
D)a partnership interest with a $40,000 basis and $40,000 ordinary income.

Question

Quizplus · Accepted Answer

Scott's basis in the partnership interest is equal to the amount of consideration he provided, which is $40,000. Therefore, he has a $40,000 basis in the partnership interest. However, since he received the partnership interest in exchange for accounting services, the $40,000 value of the partnership interest is considered ordinary income to Scott. Thus, the tax result to Scott is a partnership interest with a $40,000 basis and $40,000 of ordinary income.

Scott Provides Accounting Services Worth $40,000 to the ABC Partnership