Question

A is a partner in the ABC partnership. Under the partnership agreement A is entitled to $10,000 each year for his services, which are ordinary in nature and performed in his capacity as a partner. A’s share of the partnership’s profits and losses, after deduction of the services payment, is one third. For 2007 the partnership’s income, before deduction of the $10,000 payment to A, consisted of $4,000 of ordinary income and $15,000 of long-term capital gain. A and the partnership use the calendar year as their taxable years. A is a cash method taxpayer, and the partnership uses the accrual method.

(a) Determine partnership taxable income for 2007 and A’s distributive share?

(b) When is the $10,000 included in A’s gross income if it is paid to him on January 3, 2008?

(c) How does A’s entitlement to the $10,000 and the payment of this sum affect the basis of his interest?

Answer 1