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Value of Jaime's consulting services for interest in Excel

5. Jaime performed consulting services for Excel Partnership in exchange for a 10 percent interest in its capital and profits. The FMV of the partnership's assets immediately before Jaime's admission was $1,500,000. The partnerships tax basis in the assets was $800,000. How much income does Jaime recognize from this transaction?

A. $80,000
B. $150,000
C. $70,000
D. $ -0-

Please show work in detail

Solution Preview

Jaime must report the amount that is used for his/her contribution to the partnership for income tax purposes. That means Jaime declares the amount as income on her/her personal return. That provides basis to be donated to the partnership. If the basis concept seems odd, then think of it as compared to a partner donating cash. The cash partner would have earned the money to invest and likewise Jaime must report the income as earned. It is service income to Jaime.

The problem states that Jaime will receive a 10% interest. That interest will be calculated on the tax basis of the assets of the ...

Solution Summary

For Jaime's 10% interest in Excel Partnership, the tax rules are explained including the amount reportable.