Final answer:
George will be taxed on receipt of the 10% capital interest in the partnership, which is assessed at its fair market value as though it was received as income. The 20% interest in future profits is not taxable upon receipt but based on actual profit realization.
Step-by-step explanation:
When George receives a fully vested 10% interest in partnership capital and a 20% interest in future partnership profits in exchange for services rendered to the GHP partnership, the tax implications for his capital interest must be understood. Under the U.S. tax code, a capital interest in a partnership that is acquired for services is considered taxable income at its fair market value. This is because capital interests are considered property, and if transferred to compensate for services, it's as though the partner has been paid in cash equal to the value of the capital interest.
The taxable amount is determined by assessing the value of the 10% capital interest George receives. If a valuation method shows that the 10% interest equates to a certain dollar amount, this will be the income George must report on his tax return. Since the future profits of the partnership are subject to normal operating risks, his 20% interest in those would not be taxable upon receipt, but would rather be taxable when the profits are realized.
Moreover, as a partner in a general partnership structure, George should be aware of certain disadvantages such as personal liability and sharing in the responsibility of the partnership’s debts. Partnerships themselves are not taxed, but each partner pays taxes on their share of the income on a personal tax return.