George received a fully vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP, LLC (not a publicly traded partnership interest). The future profits of the partnership are subject to normal operating risks. George will report ordinary income equal to the fair market value of the profits interest, but the capital interest will not be currently taxed to him.

Question

Quizplus · Accepted Answer

George will not report ordinary income for the profits interest if it is related to future partnership profits and subject to significant entrepreneurial risk. However, the vested capital interest he received is taxable as ordinary income at its fair market value at the time of receipt, contrary to the statement.

George Received a Fully Vested 10% Interest in Partnership Capital