Question

Stephen is admitted to the HHH Partnership on January 1 of the current year in return for his services managing the partnership’s business during the year.  The HHH partnership reports ordinary income of $200,000 for the current year.

What are the tax consequences to Stephen and to the HHH partnership if Stephen receives a 30% interest in the partnership with an $80,000 FMV.

What are the tax consequences if Stephen contributes qualifying property to the HHH partnership in addition to his professional services?

Answer 1

1. 30% of the ordinary income of $200,000 i.e., $60,000 will be taxable in the hands of Stephen as Self-Employment Tax. Stephen has to file the above incomes in return Form No.1040 along with Schedule C. The tax incidence in the hands of HHH partnership will be zero, since partnership firms are just pass through entities.

If the partneship agreement provides to distribute the income on the basis of partnership interest, then income proportionate to $80,000 FMV of firm value will be taxable in hands of Stephen.

In case Stephen, decides to sale the partnership interest at a later stage, then value above $80,000 will be taxable as Capital Gains in hands of Stephen.

2. As per Section 704(c) if Stephen contributes a qualifying property to the HHH partnership, then the difference between FMV and tax asset basis value, shall be allocated to Stephen. No tax implications will be to HHH partnership.