If a partner contributes services to a partnership, how is the partner's basis in the partnership interest determined?
Understand the Problem
The question is asking how to determine a partner's basis in a partnership interest when they contribute services. The answer options provide different criteria that could be used to establish this basis.
Answer
Contributing services does not grant basis; it's taxable income.
If a partner contributes services to a partnership, generally, the partner does not receive basis in the partnership for the services contributed. Instead, the partner may receive a distributive share of the partnership profits or a guaranteed payment, which is taxable income to the partner.
Answer for screen readers
If a partner contributes services to a partnership, generally, the partner does not receive basis in the partnership for the services contributed. Instead, the partner may receive a distributive share of the partnership profits or a guaranteed payment, which is taxable income to the partner.
More Information
When services are contributed to a partnership, the partner usually receives compensation in the form of a distributive share of profits or a guaranteed payment, which is treated as taxable income. No basis is granted for services alone, as basis is linked to contributions of money or property.
Tips
A common mistake is assuming services themselves increase basis, but they do not. Basis is related to financial or property contributions.
Sources
- 26 CFR § 1.722-1 - Basis of contributing partner's interest. - law.cornell.edu
- The Tax Adviser: Partnership Distributions Rules and Exceptions - thetaxadviser.com
AI-generated content may contain errors. Please verify critical information
