In X1, Adam and Jason formed ABC, LLC, a car dealership in Kansas City. In X2, Adam and Jason realized they needed an advertising expert to assist in their business. Thus, the two members offered Cory, a marketing expert, a 1/3 capital interest in their partnership for contributing his expert services. Cory agreed to this arrangement and received his capital interest in X2. If the value of the LLC's capital equals $180,000 when Cory receives his 1/3 capital interest, which of the following tax consequences does not occur in X2?
A) Adam, Jason and Cory receive an ordinary deduction of $20,000 in X2.
B) Cory reports $60,000 of ordinary income in X2, and Adam and Jason receive an ordinary deduction of $30,000 in X2.
C) Cory reports $60,000 of ordinary income in X2.
D) Adam and Jason receive an ordinary deduction of $30,000 in X2.

Question

Quizplus · Accepted Answer

The contribution of expert services to a partnership in exchange for a partnership interest is generally taxable as ordinary income to the service provider. In this case, Cory received a 1/3 capital interest in the LLC for his marketing services, which is equivalent to $60,000 (1/3 of $180,000). Thus, Choice B and Choice C are both correct. Additionally, Adam and Jason will receive an ordinary deduction of $30,000 (1/3 of $90,000, which is the value of their capital interest after Cory's contribution) for the value of Cory's services. However, Choice A is incorrect because there is no information given to suggest that there is an ordinary deduction of $20,000 in X2.

In X1, Adam and Jason Formed ABC, LLC, a Car