PLLC_Chapter3_ProblemsCorrected.docx.docx - Practical Guide...

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Practical Guide to Partnerships and LLCs—Instructor’s Guide Problems 1 Chapter 3 – Receipt of a Partnership Interest for Services Reading: Paragraphs 301-304. 1. If a capital interest in a partnership is received for services, what are the tax effects to the service partner, the continuing partners, and the partnership? (Xiang Dai) If a capital interest in a partnership is received for services, the service partner will have a personal service income which equals to the FMV of this capital interest. For the continuing partners, they don’t have any tax effects. For the partnership, it is treated as it transfers a property to a service partner as an compensation. 2. If the capital interest is not vested, when will the service partner recognize the income from the receipt of the partnership interest? (Stephen Liu) If the partnership interest received by the service partner does not vest immediately, then the service partner recognizes no income with regard to receipt of the partnership interest until it is vested. At that time, the service partner will recognize compensation income equal to the value of the partnership interest received, as measured at the vesting date. 3. What are the tax effects if a §83(b) election is made by a service partner if they get a partnership capital interest that is not vested? (David Lee) The service partner may include the partnership interest as income when it is received and ignore the contingency attached to the interest. Taxes will be measured at the initial value of the partnership interest. However, if the partnership interest is forfeited at a later time, the partner will not be able to deduct this loss even though they have a basis for this forfeited interest.

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