Tara and Robert formed the TR Partnership four years ago. Because they decided the company needed some expertise in multimedia presentations, they offered Katie a 1/3 interest in partnership capital and profits if she would come to work for the partnership. On July 1 of the current year, the unrestricted partnership interest (fair market value of $25,000) was transferred to Katie. How should Katie treat the receipt of the partnership interest in the current year?
A) Nontaxable.
B) $25,000 ordinary income.
C) $25,000 short-term capital gain.
D) $25,000 long-term capital gain.
E) None of the above.

Question

Quizplus · Accepted Answer

Katie should treat the receipt of the partnership interest as $25,000 ordinary income because it was received in exchange for her services, making it taxable as compensation.

Tara and Robert Formed the TR Partnership Four Years Ago