An individual who contributes services in exchange for an interest in the future profits of a newly formed partnership does not recognize current year income on the receipt of the interest.

Question

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Under the partnership formation rules, if an individual contributes services in exchange for a partnership interest in a newly formed partnership, they do not recognize current year income on the receipt of the interest. Instead, their share of partnership profits is treated as ordinary income in the year in which the profits are earned. This is known as a "capital interest" in the partnership.

An Individual Who Contributes Services in Exchange for an Interest