Final answer:
When a service partner receives capital interest, they recognize ordinary income for the liquidation value of the partnership received. For profits interest, the service partner does not immediately recognize ordinary income.
Step-by-step explanation:
When a service partner receives capital interest from a partnership, it is considered as a distribution of profits. In this case, the service partner recognizes ordinary income for the liquidation value of the partnership received. This means that the service partner will immediately recognize and report this income on their tax return.
On the other hand, when a service partner receives profits interest, it is not considered as a distribution of profits. Instead, it represents a share in the future profits of the partnership. Therefore, the service partner does not immediately recognize ordinary income for the value of the profits interest received. They will only recognize and report income when the partnership generates profits in the future.