[Anonymous]

Nolan designed Timber Partnership’s new building. Nolan received an interest in the partnership for the services. Nolan’s normal billing for these services would be $80,000 and the fair market value of the partnership interest Nolan received is $120,000. What amount of income should Nolan report?

a. $80,000

b. $40,000

c. $0

d. $120,000

Explanation

Choice “d” is correct. In this question, Nolan receives an interest in the partnership for services performed. The services are valued at the fair market value of what is received (the partnership interest) of $120,000, regardless of what Nolan’s normal billing for these services might have been.

Choice “c” is incorrect. Nolan would certainly report some income from the services that she performed when something is received in return for those services.

Choice “b” is incorrect. The $40,000 is the difference between the fair market value of the partnership (and of the services performed) and Nolan’s billing. That number is meaningless in this question.

Choice “a” is incorrect. The $80,000 is Nolan’s normal billing for her services. However, her income is the $120,000 fair market value of the services. Perhaps, she should charge more. The difference is not considered a gift.

So, for partnerships where service is performed in exchanged for partnership interest, we use the FMV of the partnership interest, not the FMV of the services.

However, for C-Corp, in this same situation, we would use the FMV of the services performed and not the FMV of the stock to calculate shareholder’s basis? Or is this only when the 80% control test is passed?

Also, in a C Corp, if someone exchanges property for stock and it does not pass the 80% control test, what do we use? The Becker pass key shows if it qualifies as a taxable event, we use FMV, but of what? Is it FMV of stock – adjusted basis in property or is it FMV of property becomes the stock basis with the excess of FMV of property over old basis becoming the taxable gain?

I’m using Becker and it just seems that they skimped on a lot of clarifying details in this section. Please help me!

[leglock]

Whenever you trade services and receive something of value for them, you have to recognize income. Whether the 80% threshold is met or not, if you traded services, you have to recognize it as income. The amount you recognize as income is the FMV of what you RECEIVED. They try to confuse you with the fmv of what you gave up, but an easy way to remember it is if as an accountant you provide a service to someone that only took 15 mins of your time which is worth 20 dollars but they pay 150, you have to claim 150 as income (fmv of what you received, not what you gave up)

Lastly, for the 80% rule, you do not include in the calculation those individuals who contributed a service. This is another trick that they love.

when 80% is not met, I cannot remember the answer to your question but knew it when I took REG. I believe there are m/c questions that will provide that scenario of which the answer will clue you in on the answer. Hopefully someone else can address that question.

[StephAV]

Leglock – I love your explanation! I feel like my issue with REG is I need to understand things and without a lot of hands on tax experience, there is a lot I just haven't reasoned out like that.

The 80% rule is for contribution of property to corporations. If the shareholders contributing property own 80% or more of the corp then the transaction qualifies as a section 351 tax free transaction. Carryover basis is used and there is no gain or loss…

I think the difference is the 80% is more for formation of the corporation, so the FMV of the stock received would be the basis of whatever had been contributed and it is applicable to property, not services…

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[Anonymous]

Okay, thank you! The pass key for computation of basis to shareholder for C Corp says you add the FMV of services “rendered” so its a little bit of a discrepancy. So frustrating, I am not impressed with Becker's breakdown of basis, a side-by-side comparison of the similarities and differences between entities would have really helped.

I think, for the other question that you probably use the FV of interest receiving – basis of consideration you are giving up; this seems to be pretty standard rule when it is considered a taxable transaction. Will do more research today. Exam tomorrow!

[Anonymous]

Ahh, something just occurred to me. Most likely, the FMV of “services rendered” is only used if you are contributing property as well. If you are only receiving interest for services, then you wouldn't qualify for the 80% rule for non taxable event BUT if you are also contributing property, then it would qualify so you would only increase your basis by how much your services are worth and then claim that amount as ordinary income. Does that theory seem right?

[Author]

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