Sean is admitted to the calender year XYZ Partnership on December 1 of the curre

Question

Sean is admitted to the calender year XYZ Partnership on December 1 of the current year in return for his services managing the partnership's business during the year. The partnership reports ordinary income of $100,000 for the current year without considering this transaction. Assume a nonleap year.

What are the tax consequences to Sean and the calendar year XYZ Partnership if Sean receives a 20% capital and profits interest in the partnership with a $75,000 FMV?

What are the tax consequences to Sean and the xyz Partnership if Sean recieves only a 20% profits interest with no determinable FMV?

Explanation / Answer

Sean reports $75,000 of ordinary income and has a $75,000 basis in his partnership interest. . The partnership (and the remaining partners) must also recognize gains and losses as if 20% of each asset had been sold at its FMV to pay for Sean's services. The basis in each asset having a gain (or loss) related to it will be adjusted upward (or downward) by the amount of the gain (or loss) recognized.

Under the Sol Diamond case, if there is an ascertainable FMV for the interest, such value must be reported as income by Sean and is deductible by the XYZ Partnership. If there truly is no ascertainable FMV for the 20% interest, neither Sean nor the XYZ Partnership has any current tax consequences. See Rev. Proc. 93-27 where the IRS indicated that only in three specific instances will it tax a profits interest received for services.

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