Question

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 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?

1) Carried interest.
2) 25,000 long-term capital gain.
3) Nontaxable.
4) 25,000 short-term capital gain.
5) 25,000 ordinary income.

Answer 1

The Correct option is 5). Katie should treat the receipt of the unrestricted partnership interest, valued at $25,000, as ordinary income in the current year.

Step-by-step explanation:

When Katie receives a 1/3 interest in the TR Partnership, which has a fair market value of $25,000, as compensation for her contribution to the firm's multimedia presentation expertise, this transaction is treated for tax purposes as compensation for services. Therefore, the partnership interest Katie received is not considered a carried interest, capital gain, or a nontaxable gift. Instead, it should be considered ordinary income for Katie because it is compensation for services. The value of the partnership interest that Katie has to report as income for the current tax year would be $25,000, in compliance with the Internal Revenue Service regulations.